Does the US. macroeconomic news make the South African stock market riskier?

The relationship between macroeconomic risk and security returns has been central to financial economics. A well-known concept in capital asset pricing theory is that only systematic risk factors affect security prices. Macroeconomic news announcements are among the most important systematic risk factors for financial markets because the state of the economy is a major source of non-diversifiable risk. The effects of US macroeconomic news on South African stock markets has received no attention in the domestic or international literature. To fill this gap, this article analyzes the impact of US macroeconomic announcement surprises on the volatility of the South African equity market by employing the asymmetric GJR-GARCH model that allows for both positive and negative surprises about inflation and unemployment rate announcements in the U.S. The study uses daily Johannesburg All Share Index (JALSI) returns from 31 May 1994 to 8 March 2016; and inflation and unemployment rates news surprises about the U.S., where the data on market expectations are obtained from the Money Market Survey, and the Bloomberg Survey expectations. This paper finds that shocks to volatility are persistent and asymmetric. While bad news about US inflation does not affect the volatility of South African stock returns, good news tends to increase the volatility. The South African stock market becomes riskier with an unexpected increase in the US unemployment rate and less risky with an unexpected decrease in the US unemployment rate, with the latter effect being stronger than the former. The unexpected decreases in inflation and increases in unemployment raises stock market volatility in South Africa, which in turn, would imply that financial conditions in South Africa would deteriorate and affect the real economy negatively. This is an important finding for portfolio allocation and asset pricing, as well as for policy makers. The stock market volatility is an important component in measuring the financial conditions scenario for South Africa, and that worsening of the financial conditions negatively affect the real economy, which in turn, requires monetary authorities to pursue expansionary monetary policies. Given this, policy makers need to be aware such a scenario and need to respond with expansionary monetary policies to boost the real economy.