Central bank policy rate announcements and high-frequency intra-day benchmark stock returns reaction dynamics: Evidence from South Africa

Abstract

ABSTRACT This paper investigates the chronological impact of South African Reserve Bank (SARB) repo rate announcements on the Financial Times Stock Exchange/Johannesburg Securities Exchange (FTSE/JSE) All Share Index (ALSI) returns and returns volatility. Covering the period 2012–2021, the study employs the ‘event study’ approach, a risk augmented generalised autoregressive conditional heteroscedasticity (GARCH-in-mean) model, and high-frequency intra-day 1-minute stock quotes during narrow windows to avert (or minimise) data contamination problems – endogeneity bias and coinciding effects of other exogenous variables on the stock market around the repo rate announcement time. In line with a priori expectations, there is an inverse relationship between stock returns and repo rate surprises (or unexpected repo rate changes). And consistent with findings in developed economies, our econometric results show that the reaction of the South African (SA) stock market to repo rate surprises is swift, indicating a high degree of ‘mechanical efficiency’ in respect to central bank policy rate surprises. But the delayed returns volatility response mirrors that of findings in the scant empirical literature on emerging markets. Evidence of both time-varying risk-return and time-varying degree of ‘informational efficiency’ is consistent with the adaptive market hypothesis (AMH).