Abstract
The study sought to assess the impact of interest rates on the equity market in South Africa. Monthly data was collected from Thomson Reuters and the South African Reserve Bank from 2002 to 2020. Interest rates through open market operations have an influence on money supply and changes in interest rates affect investors’ decision making. Investors are big players in the equity market and the equity market is deemed as the engine of an economy in that when there is efficient equity market performance the economy will grow. The Vector Auto Regression (VAR) model was applied to analyse the relationship between interest rates and the South African equity market. The Vector Error Correction Model and Johansen Cointegration tests were applied to assess the short and long-run dynamic relationship between interest rates and the equity market. Stationarity test, correlation test, cointegration test and diagnostic test were implemented on the data to help the study attain robust and reliable results. The study found that there is a negative relationship between interest rates and the equity market.
Keywords: Interest Rates, Equity Markets, Vector Error Correction Model (VECM), Johansen Cointegration and Granger Causality.