IS THE STOCK MARKET A “BAROMETER” OF THE ECONOMY? BASED ON SOUTH AFRICA COMPREHENSIVE ANALYSIS
DOI:
https://doi.org/10.2478/eoik-2025-0072Keywords:
Stock Market, Barometer of the Economy, Cointegration, Vector Error Correction Model (VECM), South AfricaAbstract
An efficient stock market supports economic growth and is a barom-
eter of South Africa’s financial health. Our research delves into how
macroeconomic variables impact stock prices in South Africa by in-
vestigating yearly time series data ranging from 2000 to 2023. We
utilise Johansen’s cointegration test and the Vector Error Correction
Model (VECM) to investigate the equilibrium relationship between
stock market prices and critical macroeconomic factors like infla-
tion (INFL), trade rate (TR), money supply (MS) and exchange rate
(EXCH). The study findings indicate that these factors are correlated
in the long run, indicating a lasting correlation between specific mac-
roeconomic indicators and stock market prices. Stock market prices
are affected positively by exchange rates and inflation, as well as by
the money supply; however, trade rates have a negative impact accord-
ing to the analysis of short-term financial dynamics, which suggests
that adjustments are made to reach a long-term equilibrium despite the
lesser immediate effects of macroeconomic factors. Granger causality
tests show that macroeconomic factors influence stock market prices
over long and short-term periods. This highlights the importance of
the stock market as an indicator of trends and signals potential shifts
in the broader economy, which policymakers and investors should
keep a close eye on as an early warning system.
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