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Long-run equilibrium adjustment between inflation and stock market returns in South Africa: a nonlinear perspective


  • Andrew Phiri


Following the global financial crisis of 2007-2008, the empirical investigation into financial variables affecting the performance of stock markets gained prominence in empirical research. This study investigates the asymmetric cointegration effects of inflation on the stock market returns for the Johannesburg Stock Exchange (JSE) using monthly data collected from 2003:01 to 2014:12. The empirical model used in the study is the momentum threshold autoregressive (MTAR) model. Indeed, our results reveal a negative, nonlinear cointegration relationship between inflation and stock returns in South Africa with causality running unidirectional from inflation to stock returns. The results further suggest that investors cannot hedge against rising inflation by investing in equity stocks listed on the JSE. Second, monetary policy, through the use of inflation targets, can provide a stable financial environment for the growth of equity markets in South Africa.

Suggested Citation

  • Andrew Phiri, 2017. "Long-run equilibrium adjustment between inflation and stock market returns in South Africa: a nonlinear perspective," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 9(1), pages 19-33.
  • Handle: RePEc:ids:ijsuse:v:9:y:2017:i:1:p:19-33

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    References listed on IDEAS

    1. Alagidede, Paul & Panagiotidis, Theodore, 2010. "Can common stocks provide a hedge against inflation? Evidence from African countries," Review of Financial Economics, Elsevier, vol. 19(3), pages 91-100, August.
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    8. Dandan Liu & Dennis Jansen & Qi Li, 2005. "Regime switching in the dynamic relationship between stock returns and inflation," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(5), pages 273-277, September.
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    11. Riona Arjoon & Mariëtte Botes & Laban K. Chesang & Rangan Gupta, 2011. "The long-run relationship between inflation and real stock prices: empirical evidence from South Africa," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 13(4), pages 600-613, July.
    12. Choudhry, Taufiq, 2001. "Inflation and rates of return on stocks: evidence from high inflation countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 11(1), pages 75-96, March.
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    15. Andrew Phiri, 2015. "Asymmetric cointegration and causality effects between financial development and economic growth in South Africa," Studies in Economics and Finance, Emerald Group Publishing, vol. 32(4), pages 464-484, October.
    16. Boudoukh, Jacob & Richardson, Matthew, 1993. "Stock Returns and Inflation: A Long-Horizon Perspective," American Economic Review, American Economic Association, vol. 83(5), pages 1346-1355, December.
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    Cited by:

    1. Kolisi, Nwabisa & Phiri, Andrew, 2017. "Changes in the relationship between interest rates and housing prices in South Africa around the 2007 financial crisis," MPRA Paper 80173, University Library of Munich, Germany.
    2. Muhammad Kamran Khan & Jian-Zhou Teng & Javed Pervaiz & Sunil Kumar Chaudhary, 2017. "Nexuses between Economic Factors and Stock Returns in China," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(9), pages 182-191, September.
    3. Andrew Phiri, 2020. "Structural changes in exchange rate-stock returns dynamics in South Africa: examining the role of crisis and new trading platform," Economic Change and Restructuring, Springer, vol. 53(1), pages 171-193, February.
    4. Phiri, Andrew, 2017. "Threshold convergence between the federal fund rate and South African equity returns around the colocation period," Business and Economic Horizons (BEH), Prague Development Center (PRADEC), vol. 13(1).
    5. Sinazo Guduza & Andrew Phiri, 2017. "Efficient market hypothesis: Evidence from the JSE equity and bond markets," Working Papers 1718, Department of Economics, Nelson Mandela University, revised Dec 2017.

    More about this item


    inflation; stock returns; threshold error correction; TEC model; Johannesburg Stock Exchange; JSE; South Africa; Sub-Saharan Africa; SSA; emerging economies; momentum threshold autoregressive model; MTAR; long-run equilibrium adjustment; stock markets; asymmetric cointegration effects; monetary policy; inflation targets.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)


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