Abstract
This research examines the impact of the interest rate on the stock market in South Africa,
while considering the role exchange rate volatility plays in this relationship. The study makes
use of the Markov-switching Vector Autoregressive (MS-VAR) to examine the reactions of the
stock market to shocks in the exchange rate, while examining the effect of exchange rate
volatility on the relationship between the equity market and the interest rate. The study used
data from the JSE top 40 stock market index, treasury bills interest rates and the US dollar to
SA rand exchange rates for the period from 2004 to 2022. The results suggest that the
volatility periods may be modelled using the exchange rate volatility. Results further show
that the relationship between the equity market and the interest rate follow regime switching
behaviour, such that during a high volatility regime the impact of the interest rate on the
equity market is significantly high and positive, while it is negative during a low volatile period.
Our findings can contribute toward informing the monetary policy makers to carry through a
suitable interest rate policy during volatile (crisis) as well as non-volatile periods. Furthermore
investors could then make informed decisions when making investments into the South
African stock market during the volatile and non-volatile times.
Keywords: interest rate, exchange rate, volatility, stock market, MSVAR