MACROECONOMIC UNCERTAINTY AND CONDITIONAL STOCK MARKET VOLATILITY IN SOUTH AFRICA

Authors


  • The financial support from Economic Research Southern Africa (ERSA) towards this study is gratefully acknowledged. Views expressed are those of the author and do not necessarily reflect those of ERSA.

  • The author expresses his gratitude to two anonymous reviewers for the insightful comments. Helpful comments from an anonymous reviewer from ERSA, Meshach Aziakpono and Jen Snowball from the Universities of Stellenbosch and Rhodes, respectively, on an earlier version of this paper are also acknowledged. The usual disclaimer applies.

Abstract

This paper analyses how systematic risk emanating from the macroeconomy is transmitted into stock market volatility using augmented autoregressive Generalised Autoregressive Conditional Heteroscedastic (AR-GARCH) and vector autoregression (VAR) models. Also examined is whether the relationship between the two is bidirectional. By imposing dummies for the 1997-1998 Asian and the 2007-2009 sub-prime financial crises, the study further analyses whether financial crises affect the relationship between macroeconomic uncertainty and stock market volatility. The findings show that macroeconomic uncertainty significantly influences stock market volatility. Although volatilities in inflation, the gold price and the oil price seem to play a role, it is found that volatility in short-term interest rates and exchange rates are the most important, suggesting that South African domestic financial markets are increasingly becoming interdependent. Finally, the results show that financial crises increase volatility in the stock market and in most macroeconomic variables, and, by so doing, strengthen the effects of changes in macroeconomic variables on the stock market.

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