Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)


The Effects of Monetary Policy on Stock Market Returns and Volatility: Evidence from South Africa

Author(s): Godfrey Marozva

For several decades finance professionals have debated on the effects of monetary policy variables on stock returns. This article examines the extent to which stock returns are linked to interest rate and exchange rate in South Africa from 1995 to 2019, using OLS and GARCH (1,1). Some unanticipated results were uncovered, ultimately contributing to the existing body of literature and illustrating how different markets respond to different stimuli. The most substantial was the significant positive relationship between stock returns and interest rates. A relationship that can be explained by the Keynesian hypothesis based on a sticky price model. In line with theory results revealed a negative and significant relationship between exchange rates and stock market price returns. Also, the study revealed a positive and significant relationship between stock returns volatility and interest rates. However, exchange rates only exhibited a significant positive relationship under the OLS methodology for the JSE All-Share Index return volatility. This study may assist stock market regulating authorities, monetary policy authorities and other stock market participants in understanding the effects of monetary policy variable on stock returns. Further research may dwell on the causality and cointegrating relationships as deterministic relationship may not be dependable for policy formulation and forecasting.

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