Monetary Conditions and Stock Returns: A South African Case Study
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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Bernanke, Ben S & Blinder, Alan S, 1992.
"The Federal Funds Rate and the Channels of Monetary Transmission,"
American Economic Review,
American Economic Association, vol. 82(4), pages 901-21, September.
- Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
- Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
- 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.
- Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988.
"Financing Constraints and Corporate Investment,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0205002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.