An analysis of share prices and economic activity in South Africa: an NARDL approach.
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Date
2021
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Abstract
An integral component of economic activity rests on the performance of share prices as it
influences consumer and business confidence which in turn affects the performance of the overall
economy. The progressive characteristics of share prices and its successive role as an indicator of
economic growth has been widely documented in advanced and developing economies such as
South Africa but with evidence allowing for nonlinearity and asymmetric movements, being less
predominant. The key objective of this thesis is to re-examine an existing issue by using a more
complex method of analysis to determine whether fluctuations in the stock market influence the
economic growth in South Africa. This study assesses share price fluctuations and its impact on
economic growth, with the aim of identifying the nonlinearity and asymmetric effects in the
relationship by taking into consideration a primary and sectoral analysis, within a South African
context.
As such, this study utilised various different methodological techniques that established
cointegration; identified the existence of structural breaks; detected long and short-run
relationships and determined the effects of nonlinearity and asymmetric adjustments between the
stock market and economic activity, covering the period of 1999 to 2019. It was established that
the relationship between economic growth and stock prices exhibit evidence of structural breaks.
Furthermore, it was concluded that there is a strong link between the stock market and economic
activity with the 2007/2008 global financial crisis.
Most importantly, this thesis intended to determine the nonlinearity and asymmetric impacts that
stock market fluctuations have on economic activity in South Africa. It was exhibited that there is
evidence of strong nonlinear cointegration in the relationship. Additionally, there is a strong
presence of nonlinearity and asymmetric adjustment in the relationship between stock market
fluctuations and economic activity. Therefore, this study concluded that there is strong evidence
of nonlinearity and asymmetric adjustment in the cointegrating relationship and depicted that
economic growth is sensitive to stock market fluctuations in South Africa, which represents a novel
contribution to the literature.
Description
Masters Degree. University of KwaZulu-Natal, Durban.