Business cycles and stock market performance in South Africa

Abstract

The stock market is an important indicator of an economy's financial health. It checks the mood of investors in a country. Stock market performance is a vital component of business cycle growth. Thus, this study investigates the relationship between stock market performance and business cycles in South Africa for the period 2002-2009 using monthly data. This is done by constructing a Vector Error Correction Model (VECM). The study specifies a business cycle model with the business cycle coincident indicator of South Africa being the independent variable explained by the All Share Price index (ALSI), Real Effective Exchange Rate (REER), Money Supply (M1), Inflation (CPIX) and the Prime Overdraft Rate (POR). The ALSI represents stock market performance whilst the rest of the variables are to enhance model specification. The study found a positive association between stock market performance and business cycles and this match with most of the results from the empirical literature provided.