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Macroeconomic Surprises and Stock Returns in South Africa

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  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Monique Reid

    ()
    (Department of Economics, University of Stellenbosch)

Abstract

The objective of this paper is to explore the sensitivity of industry-specific stock returns to monetary policy and macroeconomic news. The paper looks at a range of industry-specific South African stock market indices and evaluates the sensitivity of these indices to a various unanticipated macroeconomic shocks. We begin with an event study, which examines the immediate impact of macroeconomic shocks on the stock market indices, and then use a Bayesian Vector Autoregressive (BVAR) analysis, which provides insight into the dynamic effects of the shocks on the stock market indices, by allowing us to treat the shocks as exogenous through appropriate setting of priors defining the mean and variance of the parameters in the VAR. The results from the event study indicate that with the exception of the gold mining index, where the CPI surprise plays a significant role, monetary surprise is the only variable that consistently negatively affects the stock returns significantly, both at the aggregate and sectoral levels. The BVAR model based on monthly data, however, indicates that, in addition to the monetary policy surprises, the CPI and PPI surprises also affect aggregate stock returns significantly. However, the effects of the CPI and PPI surprises are quite small in magnitude and are mainly experienced at shorter horizons immediately after the shock.

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File URL: http://www.ekon.sun.ac.za/wpapers/2012/wp052012/wp-05-2012.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 05/2012.

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Date of creation: 2012
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Handle: RePEc:sza:wpaper:wpapers157

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Keywords: Bayesian Vector Autoregressive Model; Event Study; Macroeconomic Surprises; Stock Returns.;

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References

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  1. Rangan Gupta & Alain Kabundi, 2008. "A Dynamic Factor Model for Forecasting Macroeconomic Variables in South Africa," Working Papers, University of Pretoria, Department of Economics 200815, University of Pretoria, Department of Economics.
  2. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES, ULB -- Universite Libre de Bruxelles 2008_033, ULB -- Universite Libre de Bruxelles.
  3. Monique Reid, 2009. "The Sensitivity Of South African Inflation Expectations To Surprises," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 77(3), pages 414-429, 09.
  4. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 425-436, March.
  5. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  6. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers, Federal Reserve Bank of Minneapolis 274, Federal Reserve Bank of Minneapolis.
  7. Z. Chinzara, 2010. "Macroeconomic uncertainty and emerging market stock market volatility: The case for South Africa," Working Papers, Economic Research Southern Africa 187, Economic Research Southern Africa.
  8. Rangan Gupta & Alain Kabundi, 2008. "Forecasting Macroeconomic Variables Using Large Datasets: Dynamic Factor Model versus Large-Scale BVARs," Working Papers, University of Pretoria, Department of Economics 200816, University of Pretoria, Department of Economics.
  9. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report, Federal Reserve Bank of Minneapolis 93, Federal Reserve Bank of Minneapolis.
  10. Clive Coetzee, 2002. "Monetary Conditions and Stock Returns: A South African Case Study," Finance, EconWPA 0205002, EconWPA.
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Cited by:
  1. Sonali Das & Rangan Gupta & Patrick T. Kanda & Monique Reid & Christian K. Tipoy & Mulatu F. Zerihun, 2012. "Real Interest Rate Persistence in South Africa: Evidence and Implications," Working Papers, Stellenbosch University, Department of Economics 17/2012, Stellenbosch University, Department of Economics.
  2. Beatrice D. Simo-Kengne & Mehmet Balcilar & Rangan Gupta & Monique Reid & Goodness C. Aye, 2012. "Is The Relationship Between Monetary Policy And House Prices Asymmetric In South Africa? Evidence From A Markov-Switching Vector Autoregressive Model," Working Papers, University of Pretoria, Department of Economics 201222, University of Pretoria, Department of Economics.

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