Volatility spillover effects of macroeconomic variables and commodities on financial markets in South Africa

Abstract

South Africa boasts one of the fast-developing stock market coupled with a well-established currency making both markets attractive for investors. However, the increased globalisation and integration of financial markets, commodities markets and macroeconomic uncertainty make it important to continuously uncover the nature of the interactions. The current research examines the time-varying volatility spillover nexus of macroeconomic variables and commodities on financial markets by using monthly data from January 2005 to January 2024. For this purpose, we employ the Diebold and Yilmaz (2009,2012) spillover index under the generalised VAR framework. Firstly, regarding the stock market, the empirical findings point to more significant time-varying directional volatility spillovers from the stock market, particularly the JSE stocks returns, to both the commodities and the macroeconomic variables although bi-directional spillovers exist. Between the macroeconomic variables and commodities, inflation has the highest spillover to the JSE stocks returns at 16.1%. Secondly, the foreign exchange market is both a directional and net directional spillover recipient from both macroeconomic variables and commodities with inflation having the highest directional spillover at 13.3 %. Bi-directional spillovers also exist in this regard. The time-varying pairwise spillover analysis for both markets shows that their spillover connectedness with the real economy is significantly affected during and post global economic shocks such as the GFC and the COVID-19 pandemic. Our conclusion was that there exist bi-directional volatility spillovers between the two financial markets and the real economy. The stock market has been a dominant spillover giver to the real economy except for oil prices whilst the foreign exchange market has remained a net receiver of volatility spillover effects. These findings provide investors with opportunities and threats for investment strategies and offer much needed information on the financial markets and real economy volatility spillover nexus for policymakers.