Macroeconomics and Monetary Economics
Abstract
This paper investigates the relationship between the macroeconomic variables, leverage and
the stock returns on the Johannesburg Stock Exchange using ARDL bounds testing approach and Vector
error correction model. A further analysis on the effects of leverage on volatility was done using a
generalized autoregressive conditional heteroscedasticity (GARCH 1,1) method. The study revealed
that there is co-integrating relationship between macroeconomic variables and stock returns.
Particularly, there is a long run relationship between stock returns and real GDP, and also between stock
returns and interest rates. Additionally, this paper shows that leverage affects the volatility of stock
prices. Finally, it is noted that after disequilibrium the economic model will always adjust to equilibrium
at a rate of thirty-three percent within a year. Since leverage positively influence volatility in stock
returns investors that are risk averse should avoid highly geared firms.
References
Abdalla, S.Z.S. & Winker, P. (2012). Modelling stock market volatility using univariate GARCH
models: Evidence from Sudan and Egypt. International Journal of Economics and Finance, 4(8), p.
161.
Abugri, B.A. (2008). Empirical relationship between macroeconomic volatility and stock
returns:vidence from Latin American markets. International Review of Financial Analysis, 17(2), pp.
396-410.
Acheampong, P.; Agalega, E. & Shibu, A.K. (2014). The effect of financial leverage and market size
on stock returns on the Ghana Stock Exchange: evidence from selected stocks in the manufacturing
sector. International Journal of Financial Research, 5(1), p. 125.
Alagidede, P. (2011). Return behaviour in Africa's emerging equity markets. The Quarterly Review of
Economics and Finance, 51(2), pp. 133-140.
Appiah-Kusi, J. & Menyah, K. (2003). Return predictability in African stock markets. Review of
Financial Economics, 12(3), pp. 247-270.
Asgharian, H.; Christiansen, C. & Hou, A.J. (2015). Effects of macroeconomic uncertainty on the stock
and bond markets. Finance Research Letters, 13, pp. 10-16.
Asgharian, H.; Hou, A.J. & Javed, F. (2013). The Importance of the Macroeconomic Variables in
Forecasting Stock Return Variance: A GARCH‐MIDAS Approach. Journal of Forecasting, 32(7), pp.
600-612.
Azar, S.A. (2010). Inflation and stock returns. International Journal of Accounting and Finance, 2(3-
4), pp. 254-274.
Berkmen, P.; Gelos, G.; Rennhack, R.K. & Walsh, J.P. (2009). The global financial crisis: Explaining
cross-country differences in the output impact. IMF Working Papers, pp. 1-19.
Chen, C.W.; Gerlach, R. & Lin, E.M. (2008). Volatility forecasting using threshold heteroskedastic
models of the intra-day range. Computational Statistics & Data Analysis, 52(6), pp. 2990-3010.
Chinzara, Z. (2011). Macroeconomic uncertainty and conditional stock market volatility in South
Africa. South African Journal of Economics, 79(1), pp. 27-49.
CNBC viewed on 2 March 2016 from http://www.cnbc.com/2015/12/10/south-african- rand-hits-lowmore-
pain-coming.html.
Devi, A. & Devi, S. (2014). Determinants of firms’ profitability in Pakistan. Research Journal of
Finance and Accounting, 5(19), pp. 87-91.
Dickey, D.A. & Fuller, W.A. (1981). Likelihood ratio statistics for autoregressive time series with a
unit root. Econometrica: Journal of the Econometric Society, pp. 1057-1072.
Elly, O.D. & Oriwo, A.E. (2012). The relationship between macro-economic variables and stock market
performance in Kenya. DBA Africa Management Review, 3(1), pp. 38-49.
Engle, R.F. & Granger, C.W. (1987). Co-integration and error correction: epresentation, estimation,
and testing. Econometrica: Journal of the Econometric Society, pp. 251-276.
Fama, E.F. (1965). The behaviour of stock-market prices. Journal of business, pp. 34-105.
Fama, E.F. (1970). Efficient capital markets: A review of theory and empirical work. The journal of
Finance, 25(2), pp. 383-417.
Fama, E.F. (1991). Efficient capital markets: II. The journal of finance, 46(5), pp. 1575-1617.
Fama, E.F. (1981). Stock returns, real activity, inflation, and money. The American Economic
Review, 71(4), pp. 545-565.
Fama, E.F. & Schwert, G.W. (1977). Asset returns and inflation. Journal of financial economics, 5(2),
pp. 115-146.
Gay, Jr. R.D. (2011). Effect of macroeconomic variables on stock market returns for four emerging
economies: Brazil, Russia, India, and China. International Business &Economics Research Journal
(IBER), 7(3).
Gomes, J.F. & Schmid, L. (2010). Levered returns. The Journal of Finance, 65(2), pp. 467-494.
Gordon, M.J. (1959). Dividends, earnings, and stock prices. The Review of Economics and Statistics,
pp. 99-105.
Granger, C.W. (1981). Some properties of time series data and their use in econometric model
specification. Journal of econometrics, 16(1), pp. 121-130.
***International Monetary Fund. World Economic Outlook (WOE) Update, January 2016.
Kaul, G. (1987). Stock returns and inflation: The role of the monetary sector. Journal of financial
economics, 18(2), pp. 253-276.
Kartikasari, D. & Merianti, M. (2016). The Effect of Leverage and Firm Size to Profitability of Public
Manufacturing Companies in Indonesia. International Journal of Economics and Financial
Issues, 6(2), pp. 409-413.
Khambata, D. (2000). Impact of foreign investment on the volatility and growth of emerging stock
markets. Multinational Business Review, 8(1), p. 50.
Kirui, E.; Wawire, W. & Onono, P.O. (2014). Macroeconomic Variables, Volatility and Stock Market
Returns: A Case of Nairobi Securities Exchange, Kenya. Doctoral dissertation, Canadian Center of
Science and Education.
Kyereboah-Coleman, A. & Agyire-Tettey, K.F. (2008). Impact of macroeconomic indicators on stock
market performance: The case of the Ghana Stock Exchange. The Journal of Risk Finance, 9(4), pp.
365-378.
Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and
taxes. The American Economic Review, 46(2), pp. 97-113.
Lambert, R.A.; Leuz, C. & Verrecchia, R.E. (2012). Information asymmetry, information precision,
and the cost of capital. Review of Finance, 16(1), pp. 1-29.
Levine, R. & Zervos, S. (1998). Stock markets, banks, and economic growth. American economic
review, pp. 537-558.
Lu, G.M.; Metin IV. K. & Argac, R. (2001). Is there a long run relationship between stock returns and
monetary variables: evidence from an emerging market? Applied Financial Economics, 11(6), pp. 641-
649.
Myers, S.C. (1977). Determinants of corporate borrowing. Journal of financial economics, 5(2), pp.
147-175.
Modigliani, F. & Miller, M.H. (1958). The cost of capital, corporation finance and the theory of
investment. The American economic review, 48(3), pp. 261-297.
Odhiambo, N.M. (2010). Finance-investment-growth nexus in South Africa: an ARDL-bounds testing
procedure. Economic Change and Restructuring, 43(3), pp. 205-219.
Pesaran, M.H. & Shin, Y. (1998). An autoregressive distributed-lag modelling approach to
cointegration analysis. Econometric Society Monographs, 31, pp. 371-413.
Pesaran, M.H.; Shin, Y. & Smith, R.J. (2001). Bounds testing approaches to the analysis of level
relationships. Journal of applied econometrics, 16(3), pp. 289-326.
Phillips, P.C. & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2),
pp. 335-346.
Ross, S. (1976). The Arbitrage Pricing Theory of Capital Asset Pricing. Journal of Economic
Theory, 13(341), p. 60.
Sharma, S.C. & Wongbangpo, P. (2002). Long-term trends and cycles in ASEAN stock markets.
Review of Financial Economics, 11(4), pp. 299-315.
Singapurwoko, A. and El-Wahid, M.S.M., 2011. The impact of financial leverage to profitability study
of non-financial companies listed in Indonesia stock exchange. European Journal of Economics,
Finance and Administrative Sciences, 32, pp.136-48.
***South Africa Reserve Bank. Quarterly Economic Bulletin September 2015.
Tunah, H. (2010). The analysis of relationships between macroeconomic factors and stock returns:
evidence from Turkey Using VAR Model International Research Journal of Finance & Economics, 57,
pp. 169-182.
Sritharan, V. (2015). Does firm size influence on firms’ Profitability? Evidence from listed firms of Sri
Lankan Hotels and Travels sector. Research Journal of Finance and Accounting, 6(6), pp. 201-207.
Wang, J. (1993). A model of intertemporal asset prices under asymmetric information. The Review of
Economic Studies, 60(2), pp. 249-282.
Zakoian, J.M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and
control, 18(5), pp. 931-955.
models: Evidence from Sudan and Egypt. International Journal of Economics and Finance, 4(8), p.
161.
Abugri, B.A. (2008). Empirical relationship between macroeconomic volatility and stock
returns:vidence from Latin American markets. International Review of Financial Analysis, 17(2), pp.
396-410.
Acheampong, P.; Agalega, E. & Shibu, A.K. (2014). The effect of financial leverage and market size
on stock returns on the Ghana Stock Exchange: evidence from selected stocks in the manufacturing
sector. International Journal of Financial Research, 5(1), p. 125.
Alagidede, P. (2011). Return behaviour in Africa's emerging equity markets. The Quarterly Review of
Economics and Finance, 51(2), pp. 133-140.
Appiah-Kusi, J. & Menyah, K. (2003). Return predictability in African stock markets. Review of
Financial Economics, 12(3), pp. 247-270.
Asgharian, H.; Christiansen, C. & Hou, A.J. (2015). Effects of macroeconomic uncertainty on the stock
and bond markets. Finance Research Letters, 13, pp. 10-16.
Asgharian, H.; Hou, A.J. & Javed, F. (2013). The Importance of the Macroeconomic Variables in
Forecasting Stock Return Variance: A GARCH‐MIDAS Approach. Journal of Forecasting, 32(7), pp.
600-612.
Azar, S.A. (2010). Inflation and stock returns. International Journal of Accounting and Finance, 2(3-
4), pp. 254-274.
Berkmen, P.; Gelos, G.; Rennhack, R.K. & Walsh, J.P. (2009). The global financial crisis: Explaining
cross-country differences in the output impact. IMF Working Papers, pp. 1-19.
Chen, C.W.; Gerlach, R. & Lin, E.M. (2008). Volatility forecasting using threshold heteroskedastic
models of the intra-day range. Computational Statistics & Data Analysis, 52(6), pp. 2990-3010.
Chinzara, Z. (2011). Macroeconomic uncertainty and conditional stock market volatility in South
Africa. South African Journal of Economics, 79(1), pp. 27-49.
CNBC viewed on 2 March 2016 from http://www.cnbc.com/2015/12/10/south-african- rand-hits-lowmore-
pain-coming.html.
Devi, A. & Devi, S. (2014). Determinants of firms’ profitability in Pakistan. Research Journal of
Finance and Accounting, 5(19), pp. 87-91.
Dickey, D.A. & Fuller, W.A. (1981). Likelihood ratio statistics for autoregressive time series with a
unit root. Econometrica: Journal of the Econometric Society, pp. 1057-1072.
Elly, O.D. & Oriwo, A.E. (2012). The relationship between macro-economic variables and stock market
performance in Kenya. DBA Africa Management Review, 3(1), pp. 38-49.
Engle, R.F. & Granger, C.W. (1987). Co-integration and error correction: epresentation, estimation,
and testing. Econometrica: Journal of the Econometric Society, pp. 251-276.
Fama, E.F. (1965). The behaviour of stock-market prices. Journal of business, pp. 34-105.
Fama, E.F. (1970). Efficient capital markets: A review of theory and empirical work. The journal of
Finance, 25(2), pp. 383-417.
Fama, E.F. (1991). Efficient capital markets: II. The journal of finance, 46(5), pp. 1575-1617.
Fama, E.F. (1981). Stock returns, real activity, inflation, and money. The American Economic
Review, 71(4), pp. 545-565.
Fama, E.F. & Schwert, G.W. (1977). Asset returns and inflation. Journal of financial economics, 5(2),
pp. 115-146.
Gay, Jr. R.D. (2011). Effect of macroeconomic variables on stock market returns for four emerging
economies: Brazil, Russia, India, and China. International Business &Economics Research Journal
(IBER), 7(3).
Gomes, J.F. & Schmid, L. (2010). Levered returns. The Journal of Finance, 65(2), pp. 467-494.
Gordon, M.J. (1959). Dividends, earnings, and stock prices. The Review of Economics and Statistics,
pp. 99-105.
Granger, C.W. (1981). Some properties of time series data and their use in econometric model
specification. Journal of econometrics, 16(1), pp. 121-130.
***International Monetary Fund. World Economic Outlook (WOE) Update, January 2016.
Kaul, G. (1987). Stock returns and inflation: The role of the monetary sector. Journal of financial
economics, 18(2), pp. 253-276.
Kartikasari, D. & Merianti, M. (2016). The Effect of Leverage and Firm Size to Profitability of Public
Manufacturing Companies in Indonesia. International Journal of Economics and Financial
Issues, 6(2), pp. 409-413.
Khambata, D. (2000). Impact of foreign investment on the volatility and growth of emerging stock
markets. Multinational Business Review, 8(1), p. 50.
Kirui, E.; Wawire, W. & Onono, P.O. (2014). Macroeconomic Variables, Volatility and Stock Market
Returns: A Case of Nairobi Securities Exchange, Kenya. Doctoral dissertation, Canadian Center of
Science and Education.
Kyereboah-Coleman, A. & Agyire-Tettey, K.F. (2008). Impact of macroeconomic indicators on stock
market performance: The case of the Ghana Stock Exchange. The Journal of Risk Finance, 9(4), pp.
365-378.
Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and
taxes. The American Economic Review, 46(2), pp. 97-113.
Lambert, R.A.; Leuz, C. & Verrecchia, R.E. (2012). Information asymmetry, information precision,
and the cost of capital. Review of Finance, 16(1), pp. 1-29.
Levine, R. & Zervos, S. (1998). Stock markets, banks, and economic growth. American economic
review, pp. 537-558.
Lu, G.M.; Metin IV. K. & Argac, R. (2001). Is there a long run relationship between stock returns and
monetary variables: evidence from an emerging market? Applied Financial Economics, 11(6), pp. 641-
649.
Myers, S.C. (1977). Determinants of corporate borrowing. Journal of financial economics, 5(2), pp.
147-175.
Modigliani, F. & Miller, M.H. (1958). The cost of capital, corporation finance and the theory of
investment. The American economic review, 48(3), pp. 261-297.
Odhiambo, N.M. (2010). Finance-investment-growth nexus in South Africa: an ARDL-bounds testing
procedure. Economic Change and Restructuring, 43(3), pp. 205-219.
Pesaran, M.H. & Shin, Y. (1998). An autoregressive distributed-lag modelling approach to
cointegration analysis. Econometric Society Monographs, 31, pp. 371-413.
Pesaran, M.H.; Shin, Y. & Smith, R.J. (2001). Bounds testing approaches to the analysis of level
relationships. Journal of applied econometrics, 16(3), pp. 289-326.
Phillips, P.C. & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2),
pp. 335-346.
Ross, S. (1976). The Arbitrage Pricing Theory of Capital Asset Pricing. Journal of Economic
Theory, 13(341), p. 60.
Sharma, S.C. & Wongbangpo, P. (2002). Long-term trends and cycles in ASEAN stock markets.
Review of Financial Economics, 11(4), pp. 299-315.
Singapurwoko, A. and El-Wahid, M.S.M., 2011. The impact of financial leverage to profitability study
of non-financial companies listed in Indonesia stock exchange. European Journal of Economics,
Finance and Administrative Sciences, 32, pp.136-48.
***South Africa Reserve Bank. Quarterly Economic Bulletin September 2015.
Tunah, H. (2010). The analysis of relationships between macroeconomic factors and stock returns:
evidence from Turkey Using VAR Model International Research Journal of Finance & Economics, 57,
pp. 169-182.
Sritharan, V. (2015). Does firm size influence on firms’ Profitability? Evidence from listed firms of Sri
Lankan Hotels and Travels sector. Research Journal of Finance and Accounting, 6(6), pp. 201-207.
Wang, J. (1993). A model of intertemporal asset prices under asymmetric information. The Review of
Economic Studies, 60(2), pp. 249-282.
Zakoian, J.M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and
control, 18(5), pp. 931-955.
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Published
2021-06-07
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Collective Authors. (2021). Macroeconomics and Monetary Economics: Array. Acta Universitatis Danubius. Œconomica, 13(4). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/1135
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