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.
References listed on IDEAS
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.:
- Ben Bernanke, 1990.
"The Federal Funds Rate and the Channels of Monetary Transnission,"
NBER Working Papers
3487, National Bureau of Economic Research, Inc.
- 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 901-921, 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.
- 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.
- 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.
- Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
- 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.
- 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.
- 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 809-830, November.
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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.