Macroeconomic Variables and South African Stock Return Predictability

Abstract

We examine both in-sample and out-of-sample predictability of South African stock return using macroeconomic variables. We base our analysis on a predictive regression framework, using monthly data covering the in-sample period between 1990:01 and 1996:12, and the out-of sample period commencing from 1997:01 to 2010:06. For the insample test, we use the t-statistic corresponding to the slope coefficient of the predictive regression model, and for the out-of-sample tests we employ the MSE-F and the ENC-NEW test statistics. When using multiple variables in a predictive regression model, the results become susceptible to data mining. To guard against this, we employ a bootstrap procedure to construct critical values that account for data mining. Further, we use a procedure that combines the in-sample general-to-specific model selection with tests of out-of-sample forecasting ability to examine the significance of each macro variable in explaining the stock returns behaviour. In addition, we use a diffusion index approach by extracting a principal component from the macro variables, and test the predictive power thereof. For the in-sample tests, our results show that different interest rate variables, world oil production growth, as well as, money supply have some predictive power at certain short-horizons. For the out-of-sample forecasts, only interest rates and money supply show short-horizon predictability. Further, the inflation rate shows very strong out-of-sample predictive power from 6-months-ahead horizons. A real time analysis based on a subset of variables that underwent revisions, resulted in deterioration of the predictive power of these variables compared to the fully revised data available for 2010:6. The diffusion index yields statistically significant results for only four specific months over the out-of-sample horizon. When accounting for data mining, both the insample and the out-of-sample test statistics for both the individual regressions and the diffusion index become insignificant at all horizons. The general-to-specific model confirms the importance of different interest rate variables in explaining the behaviour of stock returns, despite their inability to predict stock returns, when accounting for data mining.

Impact of Oil Price Shocks and Exchange Rate Volatility on Stock Market Behavior in Nigeria

“…From the result of exchange rate volatility estimates, the coefficients of the magnitude of the volatility (β) and that of the alpha (α) are significant at 1% level of significant, an indication that large shocks in the exchange rate increase volatility in the share price. This is supported by earlier works like Chinzara (2011), Gupta and Modise (2011) for South African economy, Abdalla and Murinde (1997) for India, Korea and Pakistan but contradicts Ibrahim and Aziz (2003) results on the Malaysian economy, Ozair (2006) for the US, Takeshi (2008) for the Indian economy. Similarly, the result from the oil price volatility estimates shows that both the magnitude (β) and that of the α are high, positive and significant at 1% level of significance, this implies that large innovation in the oil price will provoke volatility in the stock market to increase.…”

“…Hsing (2011) observed that negative, inconsequential relationships exist between nominal effective exchange rate and South Africa stock market index. Gupta and Modise (2011) observed that a positive relationship exist between stock price and world oil price for the South Africa economies. For the Chinese economy, Rong-Gang Cong et al (2008) examined the interactive relationship between oil price volatility and the Chinese stock market from the period 1996-2007 using VAR estimation techniques and observed that oil price volatility have no significant impact on stock returns.…”

Stock-and-flow-consistent macroeconomic model for South Africa

“…In empirical studies these have been identified as important drivers of equity prices (Chen et al 1986;Rapach et al 2005. For South Africa, Gupta andModise (2013) find that interest rates, money supply, and growth of world oil production affect stock prices.…”

Vulnerability of Islamic Financial Institutions in a Financial Crisis

“…But it should be noted that although Islamic finance is not immune to the global financial crisis, there is evidence that it has performed better than its conventional counterparts. Syed When the currency depreciates in value, the increasing price of import commodities in raw materials may cause industrialists and the business owners to be seriously affected [10,21]. This in turn affects the banks' risk-sharing profits.…”