Investigating the Causal Relationship Between Stock Market and Aggregate Economic Performance of South Africa

Abstract

Stock is one of the key securities traded in the capital markets and as such, has attracted the attention of researchers. While it is said to propel economic activities, empirical studies conducted on different countries present divergent outcomes. Thus, in this study we investigate the long-run and causal relationship between stock market and aggregate economic activities of South Africa using quarterly data from 1995Q1 to 2013Q4. We utilize the Augmented-Dickey Fuller (ADF) and Philips-Perron (PP)tests for unit root, the Johansen (1995) Maximum Likelihood cointegration technique and VEC Model. The study further employs Granger (1969) pair-wise causality test approach. It is noteworthy that the model variables have long-run relationship, but the causality test result suggests that non cause each other.