Monetary policy shocks and stock market volatility in emerging markets

Betchani Tchereni,Songezo Mpini

doi:10.22495/rgcv10i3p4

Abstract

This paper examines the effect of monetary policy decisions on stock markets in emerging economies particularly South Africa for the period 2000Q1 to 2016Q4. This is important as the monetary authorities would understand how their decisions may cause reactions to the stock market. Monetary policy directly shocks money supply and repo rate and indirectly GDP and inflation among many macroeconomic variables. A hypothesis that stock markets do not respond to monetary policy determinations is formulated and tested using a two-stage approach by employing first the vector error correction model to determine the long-run relationship of the variables and secondly GARCH (1, 2) model to determine the volatility. And the results suggest that about 5.2% variations in the Johannesburg Stock Exchange (JSE) volatility are due to monetary policy shocks. Overall, there is a negative relationship between M2 and stock market volatility. However, there is a positive link between repo rate and JSE volatility, which is not economically preferable because variations in repo rate influence the aggregate demand of investment on securities. The study recommends that the Monetary Policy Committee an expansionary monetary policy of keeping the repo rate lower must be pursued in order to increase borrowing that makes the public to have money to make transactions in securities on the financial market.

Highlights

Stock markets have shown to have a positive impact on a country‟s economic growth and development, as well as correcting the Balance of Payments (BoP) by attracting foreign investment
The results suggest that about 5.2% variations in the Johannesburg Stock Exchange (JSE) volatility are due to monetary policy shocks
This is important because it indicates that in South Africa, monetary policy shocks will impact on JSE volatility for an estimated period of 2 years

Summary

Introduction

Stock markets have shown to have a positive impact on a country‟s economic growth and development, as well as correcting the Balance of Payments (BoP) by attracting foreign investment. When the performance of the stock market shows an upward trend the companies in that economy are economically stable. This in turn attracts foreign investors since their funds are safe. The implementation of monetary policy has implications for other policies, including fiscal policy, trade policy and industrial policy Platforms such as trade policy would be affected by monetary policy say when there is an increase in money supply followed by a decrease in interest rates. This will lead to local goods being expensive and inadequately supplied and consumers will want to import their goods. An increase in interest rate will decrease the buying power for consumers which will make the poor worse off and the government will have to subsidise the poor for basic good and necessities

Objectives

Results

Conclusion