A quantitative study on the impact of microeconomic and macroeconomic variables on the JSE stock prices.

Abstract

Given the JSE's relevance in providing liquidity in the South African economy, it is crucial to understand the factors that impact the value of the All-Share Index (ALSI) of the JSE. In this study, the simultaneous impact of macro and microeconomic variables on the ALSI was analysed. Macroeconomic variables comprised the gold price, interest rate, exchange rate, gross domestic product, inflation and money supply. Microeconomic variables comprised the PE ratio, DPS, BVS, ROA and ROE. Similar research in South Africa has focused on the impact of macroeconomic variables on the ALSI. However, there is minimal research on the impact of microeconomic variables on the ALSI or the combined impact of macro and microeconomic variables on the ALSI. An understanding of the explanatory power that these economic variables have on the ALSI will help policymakers to make the right decisions at a macroeconomic level and investors to make decisions when buying shares. For this study, annual data was used from 1997 to 2016. The dependent variable was the JSE all-share index, and the independent variables were the macro and microeconomic variables. The PCA, VECM and best subset models were applied. Multicollinearity existed within the independent variables, hence the PCA model was applied to deal with the multicollinearity. After the VECM was applied, there was a presence of non-stationarity; thus, the VECM was not a suitable model. Consequently, the best subset model was applied. In the outcome of the best subset model, there was a presence of heteroscedasticity; however, the EWMA model could not remedy the heteroscedasticity. The outcome of the best subset model variables that had a significant influence on the ALSI were dividends per share and money supply with an adjusted R2 of 0.9788. In other words, macro and microeconomic variables do impact the ALSI. The impact of both macro and microeconomic variables on the ALSI is also supported by the fact that when the PCA model was applied, the first factor accounted for 52% of the variation of the ALSI and included the following variables: money supply, interest rate, gross domestic product, gold price, book value per share and dividends per share. The limitations of the study were the number of observations that could be attained, as only 20 observations were used. If financial results were made public on a monthly or weekly basis by listed companies, it would have allowed for a greater number of observations. With more observations, explorations of other models such as the ARCH/GARCH model can be carried out.