An Analysis of the Predictive Value of Business Cycle Indicators on South Afica’s Stock Market Performance


  • Chama Chipeta
  • Zandri Dickason North West University


Business cycle indicators, stock market, capital market, South Africa


The financial market’s capital market stability and development are core drivers of progressive, sound and well-functioning economic operations relied upon in both the macro-and micro-economic spheres. The stock market, a key component of the capital market, generates substantial opportunities for businesses, traders, and investors. The stock market remains a daunting securities platform amid heightening uncertainty and market disruptions. In order to broaden the mechanisms for coherent understanding and interpretation of stock market performance, this study seeks to bridge the gap between the financial and the real economy through the utilization of business cycle indicator’s (BCI) component series of the composite indicators, as potential leading signals of South Africa’s stock market performance. In scrutinizing the concordance and usefulness of BCIs as key signals for stock market analysis, the study employed a cross-correlations test, Granger causality model, variance decomposition and charting techniques. Monthly observations from June 2003 to November 2017 were used. Findings revealed that most BCIs showcase significant leading, lagging and coinciding properties in explaining stock market behaviour. A myriad of indicators identified as leading stock market signals, where combined to form a single leading index, and successfully led the durational gap in South Africa’s stock prices at consecutive periods. Based on the findings, inferences were made that BCIs are noteworthy signals for market analysis and interpretation.


Abu-Mostafa, Y. S. & Atiya, A. F. 1996. Introduction to financial forecasting. Applied Intelligence, 6(3): 205-213.
Allen, F., Otchere, I. & Senbet, L. W. 2011. African financial systems: A review. Review of Development Finance, 1(2): 79-113.
Asmah, E.E. 2013. Sources of Real Exchange Rate Fluctuations in Ghana. American Journal of Economics, 3(6): 291-302.
Braun, M. & Larrain, B. 2005. Finance and the Business Cycle: International,
Inter-Industry Evidence. The journal of finance, 60(3): 1097-1128.
Bujosa, M., García‐Ferrer, A., De Juan, A. & Martín‐Arroyo, A. 2018. Evaluating early warning and coincident indicators of business cycles using smooth trends. Journal of Forecasting, 1-17.
Burger, P. 2010. The South African business cycle: what has changed?. South African Journal of Economic and Management Sciences, 13(1): 26-49.
Campbell, J.Y., Lo, A.W. & MacKinley, A.C. 1997. The Econometrics of Financial Markets. Princeton University Press, Princeton, New Jersey.
Carmona, M., Congregado, E. & Golpe, A. A. 2012. Comovement between self-employment and macroeconomic variables: evidence from Spain. Sage Open, 2(2): 1-7.
Carriero, A. & Marcellino, M. 2007. A Comparison of Methods for the Construction of Composite Coincident and Leading Indexes for the UK. International Journal of Forecasting, 23(2): 219-236.
Chen, S. 2009. Predicting the bear stock market: Macroeconomic variables as leading indicators. Journal of Banking & Finance, 211–223.
Claessens, S., Kose, M. A. & Terrones, M. E. 2012. How do business and financial cycles interact?. Journal of International economics, 87(1): 178-190.
Clark, T.E. & West, K.D. 2007. Approximately normal tests for equal predictive accuracy in nested models. Journal of Econometrics, 138(1): 291–311.
Conrad, J. & Kaul, G. 1988. Time varying expected returns. J. Bus, 61(4): 409–425.
Damos, P. 2016. Using multivariate cross correlations, Granger causality and graphical models to quantify spatiotemporal synchronization and causality between pest populations. BMC ecology, 16(1): 1-17.
Del Águila, N. 2009. Behavioral Finance: learning from market Anomalies and psychological factors. Revista de Instituciones, Ideas y Mercados, (50): 47-104
Dickey, D. A. & Fuller, W. A. 1979. Distribution of the estimators for autoregressive time series with a unit root. Journal of the American statistical association, 74(366): 427-431.
Diebold, F. X. & Rudebusch, G.D. 1989. Scoring the leading indicators. Journal of Business, 62(3): 369–391.
Dritsaki, M. 2005. Linkage between stock market and macroeconomic fundamentals: case study of Athens stock exchange. Journal of Financial Management & Analysis, 18(1): 38-47.
Dupernex, S. 2007. Why might share prices follow a random walk. Student Economic Review, 21(1), 167-179.
Errunza, V. & Hogan, K. 1998. Macroeconomic determinants of European stock market volatility. European Financial Management, 4(3): 361-377.
Ernst and Young. 2017. EY’s Attractiveness Program Africa 2017. Connectivity redefined.$FILE/ey-attractiveness-program-africa-2017-connectivity-redefined.pdf Date of access: 02 March 2018.
Gębka, B. & Wohar, M.E. 2013. The determinants of quantile autocorrelations: evidence from the UK. Int. Rev. Financ. Anal. 29 (C): 51–61.
Gjerde, O. & Saettem, F. 1999. Causal relations among stock returns and macroeconomic variables in a small, open economy. Journal of International Financial Markets, Institutions and Money, 9(1): 61-74.
Glaser, M., Nöth, M. & Weber, M. 2004. Behavioral finance. Blackwell handbook of judgment and decision making, 527-546.
Glen, J. 2002. Devaluations and emerging stock market returns. Emerging Markets Review, 3(4): 409-428.
Granger, C. W. 1969. Investigating causal relations by econometric models and cross-spectral methods. Econometrica: Journal of the Econometric Society, 37(3): 424-438.
Gröger, J. P. & Fogarty, M. J. 2011. Broad-scale climate influences on cod (Gadus morhua) recruitment on Georges Bank. ICES Journal of Marine Science, 68(3): 592-602.
Gujarati, D.N. & Porter, D.C. 2008. Basic Econometrics. 5th Ed. Boston: McGraw-Hill Irwin.
Hassan, S. 2013. South African capital markets: An overview. chrome-extension://oemmndcbldboiebfnladdacbdfmadadm/ Date of access: 06 September 2019.
Hodrick, R. J. & Prescott, E. C. 1997. Postwar US business cycles: an empirical investigation. Journal of Money, credit, and Banking 29(1)1-16.
Hsing, Y. 2014. Impacts of macroeconomic factors on the stock market in Estonia. Journal of Economics and Development Studies, 2(2): 23-31.
Hunkar, D. 2018. South Africa’s FTSE/JSE All-Share Index Returns By Year. Date of access: 04 February 2019.
Ikoku, A. E. 2010. Is the stock market a leading indicator of economic activity in nigeria? CBN Journal of Applied Statistics, 1(1): 17-38.
Illiashenko, P. 2017. Behavioral finance: history and foundations. Visnyk of the National Bank of Ukraine, (239): 28-54.
Jefferis, K. R. & Okeahalam, C. C. 2000. The impact of economic fundamentals on stock markets in southern Africa. Development Southern Africa, 17(1): 23-51.
Lehmann, B. 1990. Fads, martingales, and market efficiency. Q. J. Econ. 105(1): 1–28.
Leigh, W., Modani, N., Purvis, R. & Roberts, T. 2002. Stock market trading rule discovery using technical charting heuristics. Expert Systems with Applications, 23(2): 155-159.
Lenee, T. L. & Oki, J. 2017. Capital Market Development and Economic Growth: Evidence from the Mint Countries. Journal of Economics and Sustainable Development, 8(2): 68-107.
Leon, C. & Filis, G. 2008. Cyclical fluctuations and transmission mechanisms of the GDP, investment and stock exchange in Greece evidence from spectral and VAR analysis. Journal of Money, Investment and Banking, 6(5): 54-65.
Lin, J. L. 2008. Notes on testing causality. Institute of Economics, Academia Sinica, Department of Economics, National Chengchi University.
Lo, A.W. & MacKinlay, A.C. 1988. Stock market prices do not follow random walks: evidence from a simple specification test. Rev. Financ. Stud, 1(1): 41–66.
MacFarlane, A. 2011. Do macroeconomic variables explain future stock market movements in South Africa? (Doctoral dissertation, University of Cape Town).
Mahama, A. C. 2013. The State of African Stock Markets. Date of access: 03 February 2019.
Malkiel, B. G. & Fama, E. F. 1970. Efficient capital markets: A review of theory and empirical work. The journal of Finance, 25(2): 383-417.
McCoy, K. J. & Blanchard, P. J.2008. Precipitation, Ground-water Hydrology, and Recharge Along the Eastern Slopes of the Sandia Mountains, Bernalillo County, New Mexico. U. S. Geological Survey.
Miller, C. & Ward, M. 2015. The market impact on shares entering or leaving JSE indices. Investment Analysts Journal, 44(1): 84-101.
Mminele, D. 2017. The performance of and outlook for the South African economy. SARB. Date of access: 05 April 2018.
Mohanty, J., Singh, B. & Jain, R. 2003. Business cycles and leading indicators of industrial activity in India. Munich Personal RePEc Archive Paper No. 12149.
Moolman, E. & Du Toit, C. 2005. An econometric model of the South African stock market: economics. South African Journal of Economic and Management Sciences, 8(1): 77-91.
Moolman, E. & Jordaan, J. 2005. Can leading business cycle indicators predict the direction of the South African commercial share price index? South African Journal of Economics, 73(1):68-78.
Napoletano, M., Roventini, A. & Sapio, S. 2006. Are business cycles all alike? A bandpass filter analysis of the Italian and US cycles. Rivista italiana degli economisti, 11(1): 87-118.
Naseer, M. & Bin Tariq, Y. 2015. The efficient market hypothesis: A critical review of the literature. IUP Journal of Financial Risk Management, 12(4): 48-63.
Nason, J. M. & Tallman, E. W. 2016. Business cycles and financial crises: The roles of credit supply and demand shocks. Macroeconomic Dynamics, 19(4): 836-882.
OECD (Organisation for Economic Co-Operation and Development). 2013. Economic Surveys South Africa. Overview%20FINAL.pdf Date of access: 02 April 2018.
Park, C. H., & Irwin, S. H. 2007. What do we know about the profitability of technical analysis?. Journal of Economic Surveys, 21(4): 786-826.
Parracho, P., Neves, R. & Horta, N. 2010. Trading in financial markets using pattern recognition optimized by genetic algorithms. In Proceedings of the 12th annual conference companion on Genetic and evolutionary computation (pp. 2105-2106).
Patra, T. & Poshakwale, S. 2006. Economic variables and stock market returns: evidence from the Athens stock exchange. Applied Financial Economics, 16(13): 993-1005.
Pearce, D. K. 1983. Stock prices and the economy. Federal Reserve Bank of Kansas City Economic Review, 68(9):7-22.
Poterba, J.M. & Summer, L.H. 1988. Mean reversion in stock prices: evidence and implications. J. Financ. Econ, 22 (1): 27–59.
Probst, W. N., Stelzenmüller, V. & Fock, H. O. 2012. Using cross-correlations to assess the relationship between time-lagged pressure and state indicators: an exemplary analysis of North Sea fish population indicators. ICES journal of marine science, 69(4): 670-681.
Rachev, S., Stoyanov, S., Mittnik, S. & Fabozzi, F. J. 2017. Behavioral Finance--Asset Prices Predictability, Equity Premium Puzzle, Volatility Puzzle: The Rational Finance Approach. arXiv preprint ar
Ritter, J. R. 2005. Economic growth and equity returns. Pacific-Basin Finance Journal, 13(5): 489-503.
Rua, A. & Nunes, L. C. 2005. Coincident and leading indicators for the euro area: A frequency band approach. International Journal of Forecasting, 21(3): 503-523.
Rusu, V. & Rusu, C. 2003. Forecasting methods and stock market analysis. Creative Math, 12: 103-110.
Sugihara, G., May, R., Ye, H., Hsieh, C. H., Deyle, E., Fogarty, M. & Munch, S. 2012. Detecting causality in complex ecosystems. Science, 338(6106): 496-500.
The conference board. 2001. Business cycle indicators handbook. New York.
Thomaidis, N. S. 2004. The Implications of Behavioural Finance for the Modelling of Securities Prices. URL: http//decision. fme. aegean. gr. 1-18.
Tripathy, N. 2011. Causal Relationship between Macro-Economic Indicators and Stock Market in India, Asian Journal of Finance & Accounting, 3(1): 208-226.
Van der Wath, N. 2015. A total return index for South Africa. Date of access: 04 February 2019.
Van Rensburg P. 1995. Economic forces and the Johannesburg Stock Exchange: A multifactor approach. De Ratione, 9(2): 45-63.
Van Rensburg P. 1998. Economic forces and the Johannesburg Stock Exchange. Unpublished doctoral thesis, University of Natal: Natal.
Van Rensburg P. 1999. Macroeconomic identification of candidate APT factors on the Johannesburg Stock Exchange. Journal for Studies in Economics and Econometrics, 23(2): 27-53.
Van Ruth, F. 2010. A cross-sectional approach to business cycle analysis. Date of access: 05 October 2018.
Van Zyl, C., Botha, Z., Skerritt, P. & Goodspeed, I. 2009. Understanding South African financial markets. 3rd edn. Pretoria: Van Schaik.
Vassalou, M. 2003. News related to future GDP growth as a risk factor in equity returns. Journal of financial economics, 68(1): 47-73.
Venter, J. C. 2005. Reference turning points in the South African business cycle: recent developments. SARB Quarterly Bulletin, 61-70.
Vinogradov, D. V. 2012. Arbitrary truncated Levy flight: Asymmetrical truncation and high-order correlations. Physica A: Statistical Mechanics and its Applications, 391(22): 5584-5597.
West, D. 2013. Do Macroeconomic Variables Explain Future Stock Market Movements in South Africa?. Proceedings of the 2013 SAAA Biennial Conference. University of Cape Town.
Willman, P., O’Creevy, M. P. F., Nicholson, N. & Soane, E. 2001. Knowing the risks: Theory and practice in financial market trading. Human Relations, 54(7): 887-910.
Wright, S., Smithers, A., Warburton, P., Pepper, G., Goldberg, J., Brodie, H., Riley, B. & Napier, R. 2013. Practical history of financial markets. Heriot-Watt University: Edinburgh Business School.






Economic Development, Technological Change, and Growth