Abstract
This study investigated the impact of macroeconomic factors (MEFs): industrial production, interest rates, exchange rates, and oil prices on the Johannesburg Stock Exchange (JSE) FTSE/JSE Africa All Shares Index (ALSI) under the Asset Pricing Model using monthly data from 2003:1 to 2021:12. A long-term equilibrium relationship between the ALSI and MEFs was revealed in the study. Interest rates, exchange rates, and oil prices were found to negatively influence the ALSI, with the effect of interest rates being significant. The significant effect of the interest arises from the fixed income instruments, such as bonds, being a strong substitute for equities. As anticipated, it was found that industrial production positively influences the ALSI in the long-run as South Africa is a manufacturing-based economy. The vector error correction model (VECM) in the study indicates a negative short-term equilibrium relationship between interest rates, exchange rates, oil prices, and the ALSI. In contrast to the long-term results, industrial production is negatively related to the ALSI in the short-term.
The error correction model suggests that deviations from long-run equilibrium in ALSI are corrected at an adjustment speed of 3.079%. This implies that adjustment to long-run equilibrium takes place at a slow pace. This is corroborated by the impulse response function, which indicates that after shocks to the MEFs, the ALSI takes around 100 months to restore to long-run equilibrium. The variance decomposition indicates that interest rates have the greatest long-term ability to explain the forecast error variance in ALSI. The exchange rates displayed the least effect on the variations of the ALSI in the long-run. This study discovered a bi-directional causality between the ALSI and interest rates, unidirectional causality running from the ALSI to industrial production and oil prices, and no relation between the ALSI and exchange rates.
Keywords
Causality, Cointegration, Error Correction Model, Equilibrium, Long-term/(run), Macroeconomic factors, Relationships, Short-term/(run), South Africa, Stock market, ALSI Vector Autoregression, Variance Decomposition, Vector Error Correction Model.