The impact of inflation on stock prices in South Africa

Abstract

The study is based on the time series analysis of stock prices in South Africa. It uses the data covering the period 1980Q1 to 2010Q4 to test the effect of inflation on stock prices. The analysis is done using Auto-Regressive Distributed Lag Model (ARDL). First, we investigate time series properties of data. The unit root test results reveal stock prices (SP), interest rate (IR), economic growth (GOP) and real effective exchange rate (EXCR) are integrated of order zero -1(0), while the growth of money supply (MS) and inflation were found to contain unit root. The Augumented Dickey-Fuller (ADF) test and the Philips-Perron (PP) tests were used to test for unit root. Causality test suggests that causation runs from inflation to stock prices. Cointegration test shows that there is cointegration and as such, Error Correction Model (EC) is done to establish short-run and long-run dynamics. The study shows that inflation does contribute negatively to stock prices.