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Monetary Conditions and Stock Returns: A South African Case Study

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  • Clive Coetzee

    (University of Stellenbosch)

Abstract

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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  • Clive Coetzee, 2002. "Monetary Conditions and Stock Returns: A South African Case Study," Finance 0205002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0205002
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    References listed on IDEAS

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    Cited by:

    1. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta & Charl Jooste & Stephen M. Miller & Zeynel Abidin Ozdemir, 2014. "Fiscal Policy Shocks and the Dynamics of Asset Prices," Public Finance Review, , vol. 42(4), pages 511-531, July.
    2. Rangan Gupta & Monique Reid, 2013. "Macroeconomic surprises and stock returns in South Africa," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 30(3), pages 266-282, July.
    3. 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.
    4. Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2015. "Do Stock Prices Impact Consumption and Interest Rate in South Africa? Evidence from a Time-varying Vector Autoregressive Model," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 14(2), pages 176-196, August.
    5. Rangan Gupta & Charl Jooste & Kanyane Matlou, 2014. "A time-varying approach to analysing fiscal policy and asset prices in South Africa," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 6(1), pages 46-63, April.
    6. Alexander Zimper, 2014. "The minimal confidence levels of Basel capital regulation," Journal of Banking Regulation, Palgrave Macmillan, vol. 15(2), pages 129-143, April.

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • G - Financial Economics

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