The Association between Stock Market Returns and Rates of Inflation

Macroeconomic identification of the priced APT factors on the Johannesburg Stock Exchange

“…Changes in the gold price, the Dow-Jones Index and inflation expectations were also found to significantly affect equity returns in prior South African empirical research (Barr, 1990;Bradfield, 1990;Correia & Wormald, 1988). To the author's knowledge there are no published studies exploring the relationship between share prices and the term structure of interest rates on the JSE.…”

“…where: Rm, = the return realized on the JSE All Share Index bme, = the constant, which should represent E(Rm) over the period of the sample UGOLD,=unanticipated percentage changes in the (rand) gold price UDJ, = unanticipated returns on the Dow-Jones Industrial Index UINF, = unanticipated changes in inflation expectations, where changes in inflation expectations (INF,) are proxied by changes in the three month Banker's Acceptance rate (BA,) i.e. INF, = BA, -BA 1 .1 (see Correia &Wormald, 1987 andFama, 1976) UTSD, = unanticipated changes in the term structure of interest rates, where the term structure of interest rates (TS,) is represented by the difference in yields between 10 year government bonds (GILT,) and three month Treasury Bills (TBILL,) i.e. TS,= GILT, -TBILL, (see Chen et al, 1986).…”

The pricing of inflation and exchange rate risks on the South African socially responsible investment index: An application of the APT model

“…However, the type of inflation to be used in the APT model is still controversial. Correia and Wormald (1988) supported the notion that APT as a model only took into consideration inflation rate as a risk factor only if there was an unexpected change in inflation. However, Hamao (1988) contended that an expected inflation rate rather than unexpected inflation rate has a more consistent explanatory power with regard to share returns.…”

“…The Fisher effect states that shares are in essence a hedge against inflation risk, which is because of the fact that share returns are said to have a positive return that compensates for the loss in purchasing power caused by inflation rate risk (Correia & Wormald 1988). Stocks are therefore believed to have inflation hedge characteristics (Elton, Gruber & Rentzler 1983).…”

The Release of Nelson Mandela: Effect on the Johannesburg Securities Exchange

“…(1) Rate of change in the three-month bankers' acceptance rate Apart from the reasons given by Herrmannsen (1998) for including this risk factor in this study the following articles confirm its importance. Empirical studies by Correia and Wormald (1987) and Van Rensburg (1995) have shown the BA to proxy inflation expectations and hence consumer prices, which by definition are a subset of economic events. Further, Nel (1994) observed "… the general course and pattern of the BA rate after 1987 was to a greater degree in harmony with that of the Bank Rate than before this time."…”