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Monetary Conditions and Stock Returns: A South African Case Study


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  • Clive Coetzee

    (University of Stellenbosch)


Extensive research on the linkages between monetary conditions and stock returns has been conducted in developed countries. This is in sharp contrast to the situation in developing countries. This paper therefore aims to study the long believed asymmetrical relationship between changes in monetary conditions and subsequent changes in stock returns in South Africa. Research in the United States of America (US) indicates that US stock returns are significantly related to the US monetary environment. The findings and results show that expansive (restrictive) monetary conditions serves as good (bad) news for stock returns, i.e. cuts in interest rates are followed by periods of excess stock returns, while increases in interest rates have a restrictive effect. The results of this study (for South Africa over the period 1991-2001) are in line with international findings, but are, in terms of South Africa, in contradiction with the findings of a previous study. This previous study on the relationship between South African monetary conditions and stock returns suggests that South African stock returns were not related to South African monetary conditions. The results of this (current) study, however, disputes the conclusions of the previous study indicating that, for South Africa, expansive monetary conditions are indeed followed by excess stock returns, while restrictive monetary conditions are followed by low or negative stock returns. The South African stock market thus perform better (worse) in expansive (restrictive) monetary conditions. This inverse relationship also seems to be more apparent in expansive than in restrictive monetary conditions. Empirical results show that the role and potency of monetary conditions, as proxied by a short-term interest rate and a monetary conditions index, in the behaviour of stock market performance for South Africa has increased over the study period, indicating the growing importance of the credit and exchange rate channels in affecting domestic monetary conditions and stock returns.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0205002.

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Date of creation: 23 May 2002
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Handle: RePEc:wpa:wuwpfi:0205002

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Keywords: Monetary Conditions; Monetary Conditions Index; MCI; Monetary Policy; Interest rates; Money Market rates; Discount Rtae; Interbank Call Rate; Exchange Rate; Rand; Stock Market; Stock Returns; VEC; VAR; Cointegration; Impulse Response Function;

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  1. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  2. Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
  3. James R. Booth & Lena Chua Booth, 1997. "Economic factors, monetary policy and expected returns on stocks and bonds," Economic Review, Federal Reserve Bank of San Francisco, pages 32-42.
  4. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  5. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  6. Domian, Dale L & Gilster, John E & Louton, David A, 1996. "Expected Inflation, Interest Rates, and Stock Returns," The Financial Review, Eastern Finance Association, vol. 31(4), pages 809-30, November.
  7. Conover, C. Mitchell & Jensen, Gerald R. & Johnson, Robert R., 1999. "Monetary environments and international stock returns," Journal of Banking & Finance, Elsevier, vol. 23(9), pages 1357-1381, September.
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Cited by:
  1. Rangan Gupta & Monique Reid, 2012. "Macroeconomic Surprises and Stock Returns in South Africa," Working Papers 201212, University of Pretoria, Department of Economics.
  2. Alexander Zimper, 2013. "The minimal confidence levels of Basel capital regulation," Working Papers 201305, University of Pretoria, Department of Economics.
  3. Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2012. "Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-Varying Vector Autoregressive Model," Working Papers 201224, University of Pretoria, Department of Economics.
  4. Rangan Gupta & Charl Jooste & Kanyane Matlou, 2013. "A Time-Varying Approach to Analysing Fiscal Policy and Asset Prices in South Africa," Working Papers 201303, University of Pretoria, Department of Economics.
  5. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel A. Ozdemir, 2012. "Fiscal Policy Shocks and the Dynamics of Asset Prices: The South African Experience," Working Papers 201228, University of Pretoria, Department of Economics.


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