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

Andrew Phiri

International Journal of Sustainable Economy, 2017, vol. 9, issue 1, 19-33

Abstract: 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.

Keywords: 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. (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (10)

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Working Paper: Long run equilibrium adjustment between inflation and stock market returns in South Africa: A nonlinear perspective (2016)
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