National University of Science and Technology

Faculty of Applied Sciences

DEPARTMENT OF APPLIED MATHEMATICS

An Econometric Analysis of the Effects of Macroeconomic Fundamentals on the Stock Market

Performance

By

Hillary A Mataruka (N006 1187X)

Supervised by Mr. Chiyaka

Submitted in partial fulfillment of the requirements of the Bachelor of Science Honors Degree in Operations Research and Statistics

June 2009

ABSTRACT
This research paper examines the general relationship between the benchmark Industrial
Index of Zimbabwe Stock Exchange and macroeconomic fundamentals in Zimbabwe
from 1990 to 2004.
The author utilized Ordinary Least Square method in his analysis and found out that
despite some fluctuations in the industrial index since 1990, this analysis indicates that
the ZSE has been performing exceptionally well during the period under review.
The movements in monetary aggregates, interest rates, inflation rate, and drought can
best explain the recent increase in the Industrial Index. However, given the current
macroeconomic climate, which is typically characterized by run-away inflation rate, a
rapid increase in money supply, declining economic growth and socio-political
environment, it is extremely difficult to judge whether the current macroeconomic
conditions, which supports high increase in industrial index, are sustainable. Thus, it
may be wise for the policymakers to take some precautions against the risk of downside
shift in stock prices.

Therein lies the paradox of Zimbabwe scenario. Despite the economic dilemma, the ZSE
has been recording exceptional returns. Should we therefore discard the widely held
wisdom of positive correlation between a countrys economic performance and the
performance of its stock market? And to what extent does macroeconomic variables like
Inflation rate, Money Supply and Interest Rates determine the performance of the

Zimbabwe Stock Exchange? This particular study will attempt to answer this
question.
CONTENTS
CHAPTER ONE................................................................................................................4
1.0 INTRODUCTION.....................................................................................................4
1.1 History of stock exchange.....................................................................................4
1.2 Nature of ZSE Dealings.........................................................................................5
1.3 Purpose of the Stock Exchange in Zimbabwe.......................................................5
1.4 Problem Statement.................................................................................................6
1.5 Aim Of The Study..................................................................................................6
1.6 Objectives of the study..........................................................................................7
1.7 Hypothesis.............................................................................................................7
1.8 Organization of the study.......................................................................................7
CHAPTER TWO...............................................................................................................8
2.0 LITERATURE REVIEW...........................................................................................8
2.1 Introduction............................................................................................................8
2.2 Econometrics.........................................................................................................8
2.3 Inflation..................................................................................................................8
2.4 Interest rates...........................................................................................................9
2.5 Theoretical literature..............................................................................................9
2.6 Empirical literature..............................................................................................10
2.7 Regression analysis..............................................................................................12
2.7.1 Assumptions Underlying Regression Analysis.................................................12
7.2 Assumptions Underlying Multiple regression Analysis......................................12
2.8 Conceptual Analysis of Multiple linear Regressions...........................................14
2.11 Solution Techniques...........................................................................................21
2.12 Steps in Model Building....................................................................................21
2.13 Checking the assumption of the regression method..........................................23
2.14 Testing The Parameters of the Model................................................................23
2.15 Model Appropriateness......................................................................................24
2.16 R2 Coefficient of Determination.......................................................................24
2.17 Correlation.........................................................................................................24
2.18 Root Unit Test....................................................................................................25
2.18 Goodness of fit in multiple regression...............................................................26
2.19 Prediction...........................................................................................................27
CHAPTER THREE.........................................................................................................28
3.0 METHODOLOGY..................................................................................................28
Introduction................................................................................................................28
3.1 Justification of variables......................................................................................28
3.2 Data sources and types.........................................................................................29
3.3 Methodology........................................................................................................30
3.4 Mathematical tools...............................................................................................30
3.5 Model Specification.............................................................................................30

3.6 Diagnostic checking.............................................................................................31

3.7 Inference..............................................................................................................31
CHAPTER 4.....................................................................................................................32
4.1 DATA ANALYSIS AND RESULTS PRESENTATION..........................................32
4.2.1 ADF Tests.........................................................................................................32
MSG...........................................................................................................................33
4.3 Estimation and results..........................................................................................33
4.4 Discussion of results............................................................................................34
4.5 Partial Regression Coefficients............................................................................35
4.6 Statistical significance of the coefficients...........................................................35
4.7 Overall significance of the model........................................................................36
4.8 Explanatory power of the model..........................................................................36
4.9 Testing for Autocorrelation (The Durbin Watson Test).......................................36
4.10 The Augmented Dickey-Fuller Test Equation for Stationarity..........................36
4.11 Diagnostic tests......................................................................................................37
4.11.1 Multicollinearity tests.....................................................................................37
4.11.2 Autocorrelation test.........................................................................................37
4.11.3 Tests for coefficients (Walds Test).................................................................37
Rejection criteria........................................................................................................37
4.13 Goodness of Fit Test..............................................................................................39
4.14 Residual Tests........................................................................................................41
Actual, Fitted, Residual graph...................................................................................41
4.16 CONCLUSION..................................................................................................43
CHAPTER FIVE.............................................................................................................44
5.1 FINDINGS AND CONCLUSION..........................................................................44
5.4 Conclusion...............................................................................................................48
Appendix 1: Sample Data...............................................................................................49
BIBLIOGRAPHY............................................................................................................51

CHAPTER ONE
1.0 INTRODUCTION
Several empirical investigations have been carried out so as to find out the determinant
variables on the stock market performance. Much emphasis has been put on the investors
perspective by looking at stock prices and returns to the detriment of effects of
macroeconomic variables. Despite the poor economic performance of the Zimbabwean
economy since 1990, the Zimbabwe stock exchange (ZSE) has been rated the best
performing emerging stock market, both in terms of returns on investments in US Dollar
terms and share price increases, surpassing 33 other emerging stock market that were
surveyed by an American Rating Agents, Standard and Poors (Techfin Research
Publications 2004).
1.1 History of stock exchange
Stock markets exist in most well-developed and financially important countries of the
world. Some of the important are the New York stock exchange, the London stock
exchange, the Paris stock exchange and the Tokyo bourse. The Johannesburg Stock
Exchange (JSE) is the largest stock exchange in Africa, south of the Sahara. The
Zimbabwe Stock Exchange (ZSE) is the third largest in Africa. The ZSE is ranked third
in region on the basis of market capitalization that is the value of shares that are available
for exchange.
The first stock market in Zimbabwe (then Rhodesia) was created in Bulawayo in 1896,
soon after the arrival of the pioneer column. This stock exchange operated for six years

only. Other stock exchanges were subsequently established in Gweru and Mutare. They
were closed in 1924. Trading on the ZSE is governed by the Zimbabwe Stock Exchange
Act (chapter 24:18). The act sets the rights and obligations of investors on ZSE.
1.2 Nature of ZSE Dealings
The ZSE dealing system is totally manual. Trading takes place on a call over system. This
occurs twice a day, at 0900 hours and at 1200 hours, Monday to Friday when stock
brokers meet at the ZSE floor. Buying and orders are satisfied at these times. The
stockbrokers ensure that all transactions are recorded in their trading books. Each page in
the book is carbonized to make two or more copies. The trading sip is then passed onto
ZSE representative for clearing.
1.3 Purpose of the Stock Exchange in Zimbabwe
A fundamental problem is how best to allocate scarce economic resources available in an
economy. Because economic resources are scarce, they should be used as productively as
possible. This ensures economic efficiency in the system.
The rate of economic growth depends on the rate of capital formation by the private
sector. This also depends on investment by producers of economic goods in machinery,
buildings, factories and skilled labor training (human capital formation). The ZSE is able
to facilitate the direction of savings to the competing investment opportunities. Capital
formation by the public sector refers to investment in the infrastructure of the economy
such as airports, energy plants, hospitals, railway lines, roads and universities.

Because of the scarce supply of savings, the need to determine what capital projects are
to be financed from the limited funds is of vital importance. It is essential that capital be
directed to those producers who are going to use it most productively. Since the ZSE
create value for a companys share, both the company and the investor can calculate a
financial return or cost if the company makes an additional issue of shares to finance its
capital development plans.
As part of its internal controls, the ZSE maintains a tight control over the activity of
quoted companies and is able to demand an explanation for anything that might indicate a
threat on the viability or performance of the company.
The ZSE is therefore able to satisfy the need for protection against any financial failure
for the investment made by the public or any inability to meet obligations, and this
endangers confidence on the part of investors.
1.4 Problem Statement
It is viewed that when a country is experiencing an economic boom, its stock market
flourishes or a rise in equity prices is experienced, but when the country is faced with a
recession; the stock market performance weakens (Singh and Weisse, 1998). Despite
deteriorating economic performance, the ZSE has been has been recording exceptional
returns. This paradox led to the compilation of this piece of work to investigate the
effects of macro-economic fundamentals on the stock market performance in Zimbabwe.
Also the ascertainment of the real relationship between industrial index and these everchanging variables is very vital in policy formulation and is the essence of this study.

1.5 Aim of the Study

To model the dynamics of macroeconomic fundamentals and how they determine stock
market performance (industrial index).
1.6 Objectives of the study
1. To determine the (econometric) relationship and direction of causality between
industrial index and the macro economic variables.
2.

To analyze the behavior of stock prices in relation to macro-economic variables; i.e.

money supply growth (MSG), inflation rate (INFL) and intrest rates (INT).

3. To provide summary on the relationship that exists between stock market

performance and macro-economic environment.
4. To estimate the econometric model that could be used to predict the industrial index
trend.
1.7 Hypothesis
There is a positive relationship between stock market performance and macroeconomic
fundamentals.
1.8 Organization of the study
The rest of the paper proceeds as follows. Chapter reviews the pertinent theoretical and
empirical literature. Chapter 3 outlines the methodology to be used the empirical result
presentation and data analysis is done in chapter 4. The paper ends by making academic
arguments and findings on the effects of macroeconomic fundamentals on the stock
market performance in chapter 5.

CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Introduction
In this chapter the author reviews theories and other studies that have been carried out in
the similar field. Firstly, we define key words and justifications of the chosen variables as
how they affect industrial index in a developing country like Zimbabwe.
2.2 Econometrics
Econometrics is a combination of economic theory, mathematical economics and
statistics but can not be reduced to any of its constituencies.
There are three main goals of econometrics:
Forecasting Using the numerical estimates of the coefficients in order to forecast the
future values of the economic magnitudes.
Analysis testing of economic theory
Policy-making Supplying numerical estimates of the coefficients of economic
relationships that may then be used for decision making.
2.3 Inflation
Inflation occurs when the general level of prices is rising. It is calculated using price
indices weighted averages of the prices of thousands of individual products.

Rate of inflation = Price level (year t) Price level (year t-1)

Price level (year t-1)

In low-inflation (single digit) environment, long term investments are viable because
people are confident that the relative prices of the goods they buy and sell will not rise
sharply in the foreseeable future. In a hyper-inflation environment, the real demand for
money falls drastically. A hyperinflationary situation is an indication of poor and unstable
macroeconomic conditions. In an unstable macroeconomic environment, planning and
forecasting in investment decision is difficult.
2.4 Interest rates
Interest rate is the price that is paid to borrow money for a stated period of time and is
expressed as a percentage.
When intrest rates are high, it is costly to borrow and there is less real investment than
when intrest rates are low.
2.5 Theoretical literature
Classical economists argue that savings in an economy are invested because of the intrest
element. Neo-classic Keysian monetary theory states that both savings and investment are
a function of intrest rate. Savings are positively related to intrest rate. As rate rises,
investors are encouraged to save more. However if real intrest rates fall as inflation rises,
investor are discouraged from saving and hence hunt for assets equities in order to
hedge against inflation. Theory predicts that investment in general has an inverse
relationship with intrest rates. Therefore as interest rises, investment falls since cost of

10

borrowing also rises. There is mixed skepticism about other investment such as money
market due to volatility and uncertainty of returns.
Levine and Zervos (1998) hypothesis purports that financial liberalization has beneficial
effects on economies of developing countries because real deposit rates are allowed to be
increasingly positive within the range of conduit effect i.e. more financial savings are
collected, investment is increased, allocative efficiency of capital markets is increased
and growth results. The underlying principle is that an increase in intrest rates will make
savers save more and the savings will be channeled into investment. In this context Shaw
said financial sector render a valuable service in lowering the real costs to investors.
2.6 Empirical literature
Breeden (1979) recognized that not only has the stock market increased relative to the
economy but also it appears that the interrelationship between the two has strengthened.
It has always been recognized that the stock market reflects to some extent the goings on
in the rest of the economy.
More recently however there has been widespread recognition that dramatic events in the
stock market are likely to have a substantial impact upon the wider real economy and it
has become apparent that macroeconomic policy makers are paying considerable
attention to stock market in their evaluation of the economy task which forms part of the
process of formulating monetary policy. The trend is due, at least in part to existing
evidence suggesting that stock prices tend to lead economic activity (e.g. Fama 1990,
Chen et al 1991). The growing interest in the relationship between actual and warranted
of fundamental share prices.

11

Tsuyoshi T (2001), who analyzed the general relationship between stock prices and
macroeconomic variables in Zimbabwe, did a study that is so particular to Zimbabwe. He
noted that by using error correction model to stock returns show that the relationship
between stock return and growth of money and treasury bill rates has been quite stable
since 1990, except during the period of partial capital account liberalization. An analysis
of individual stock returns indicates that the ZSE assimilates changes in the
macroeconomic variables quite constant.
The study principally used semi-annual series of broad money (M3), 90-day Treasury bill
rates and the two series that are relatively obtainable and satisfy the condition in many
countries for proxy for corporate income steams and discount rate. The sample period
was set from the first half of 1990 to the second half of 2004 so as to cover the full period
intrest rate liberalization. A unit root showed that money supply and stock index are co
integrated of order two and TB of order one.
It should be noted, however, that the successful functioning of any economy demands the
mobilization of capital resources available and their productive utilization in the
development of all sectors of the economy. In Zimbabwe, it is presumed that the ZSE
plays the role of raising funds between entrepreneurs and the investing public.
The survey conducted by Standard and Poor indicated that Russia experienced share price
increase of 60% in 2001 compared to 48% and 31% for South Korea and Sri Lanka
respectively. With this regard to the returns on investment, the performance of the
emerging markets also lagged that of the ZSE by significant margins with Russia, South
Korea and Sri Lanka, attaining increase in returns on investment in US dollar terms of
64.1%, 61.2% and 49.9% respectively during the same period.

12

From the above illustration, it is crystal clear that ZSE has been performing exceptionally
well as shown in the graph below.

Industrial Index

Mining Index

250000
200000
150000
100000
50000

Mining Index

1200000
1000000
800000
600000
400000
200000
0

0
1/4/1999
3/22/1999
6/8/1999
8/25/1999
11/5/1999
1/25/2000
4/6/2000
6/27/2000
9/8/2000
11/21/2000
2/7/2001
4/25/2001
7/10/2001
9/21/2001
12/4/2001
2/19/2002
5/8/2002
7/19/2002
10/3/2002
12/16/2002
3/4/2003
5/20/2003
8/8/2003
10/23/2003
1/9/2004
3/23/2004
6/9/2004
8/24/2004

Industrial Index

ZSE Performance Since 1999

Despite the good performance by ZSE, the economy has been deteriorating. Zimbabwe
has been experiencing harsh economic activity which characterized by high inflation rate
which reached an all time high of 622.8% in January 2004 (CSO February 2004),
foreign currency shortages, unemployment low levels of production, ever increasing
production cost and declining growth rate.
2.7 Regression analysis
2.7.1 Assumptions Underlying Regression Analysis
1) The dependent variables are non random and are observed with negligible error
2) The error terms are normally distributed random variables with mean zero and constant
variance.
3) The error terms are uncorrelated that is E (ei,ej) = 0

13

7.2 Assumptions Underlying Multiple regression Analysis

2.7.2.1 Linearity
The relationship between the predictors (explanatory variables) and the outcome
(response variables) should be linear, that is, the relationship between the explanatory
variables and outcome variables is linear. In other words, each increase by one unit in the
explanatory variable is associated with a fixed increase in the response variable.
2.7.2.2 Normality
It is assumed in multiple regression that the residuals (predicted minus observed values)
are distributed normally (i.e., follow the normal distribution). Again, even though most
tests (specifically the F-test) are quite robust with regard to violations of this assumption,
it is always a good idea, before drawing final conclusions, to review the distributions of
the major variables of interest. You can produce histograms for the residuals as well as
normal probability plots, in order to inspect the distribution of the residual values.
2.7.2.3 Homoscedasticity
The researcher should test to assure that the residuals are dispersed randomly throughout
the range of the estimated dependent. The variance of the residual error should be
constant for all values of the independent (s).If not separate models may be required for
the

different

ranges.Also,when

the

Homoscedasticity

assumption

is

violated

conventionally computed confidence intervals and conventional t-tests for OLS

(Ordinary Least Squares) estimators can no longer be justified (Berry, 1993).

14

2.7.2.4 Independence
The errors associated with one observation are not correlated with the errors of any other
observation. The explanatory variables are independent of each other that is, knowing the
value of one or more of the independent variables do not tell us anything about the others.
This is often not the case in real life because many variables are correlated. Such
correlations lead to mistaken conclusions.
2.8 Conceptual Analysis of Multiple linear Regressions.
2.8.1 The idea of a regression equation
Like many statistical procedures, multiple regressions have two functions: to summarise
some data, and to examine it for (statistically) significant trends. The first of these is part
of descriptive statistics, the second of inferential statistics. In this project, I have
concentrated on how multiple regressions describe a set of data.
2.8.2 Multiple regression
If we have more than two independent variables, we represent the relationship by an
equation. This is what multiple regression does. It's a straightforward extension of simple
regression. If there are n independent variables, we call them x1, x2, x3 and so on up to
xn. Multiple regression then finds values of a, b1, b2, b3 and so on up to bn which give
the best fitting equation of the form
y = a + b1x1 + b2x2 + b3x3 + ... + bnxn

15

b1 is called the coefficient of x1, b2 is the coefficient of x2, and so forth. The coefficient
of each independent variable tells us what relation that variable has with y, the dependent
variable, when all the other independent variables are held constant. So, if b1 is high and
positive, that means that if x2, x3 and so on up to xn do not change, then increases in x1
will correspond to large increases in y.
2.8.3 Regression Diagnostic
This is the most important tool in the model formulating using Multiple Linear
Regression (MLR) and it entails the rigorous checking of the above mentioned
assumptions to see whether they have not been violated and to asses the accuracy of the
computations of regressions of regression analysis. Checking the behavior of the residual
usually does these diagnostics.
i.

Multiple linear regression analysis builds on univariate and bivariate analysis.

This is followed by a descriptive statistics and bivariate analysis in which the
relationship between the response and the explanatory variables are further examined.
Once this information has been complied, the relationship between several explanatory
variables and response variables can be further explored. Multiple regressions will
provide the independent contribution of each explanatory variable to the prediction of
the outcome while controlling for the influence for the influence of the other
explanatory variables.

ii.

Multiple linear regressions explore the value of the independent variable as

dependent on several independent variables.

16

iii.

In addition to describing the relationship between the independent and the

dependent variables, multiple regressions can be used to judge the relative importance
of different independent variables by comparing their t-ratios.

iv.

Categorical variables can be included in the regression equation with values like
0/1.This is an advantage because one can look at the possible variation in outcome in
the presence or absence of a categorical variable.

Thus we also check the behaviour of the residuals to do the diagnostics.

2.8.4 Residual Analysis
A model is satisfactory if none of its assumptions are (grossly) violated. Thus before a
model can be used to make inferences it must be subject to diagnostic checking for model
adequacy. If the assumptions of regression analysis hold the behavior of the residuals
obtained after fitting the model should not deviate from that of the model errors. The
essence of this analysis is to see if E(e j) = 0 and E(e ) = where is plotting of
residuals against fitted values check if the assumptions of linearity, independence, equal
variance and normality, that is , all basic assumptions of general liner model. The plot
should be characterized by small residuals with no apparent structure or pattern.
Constructing the histogram of residuals can be used to check the assumptions of
normality. The plot of the residuals should show an appropriately normal distribution
curve with mean zero.

17

2.8.5 Autocorrelation
This is a situation whereby there is a non-zero correlation between successive values of
the same variables or series, sometimes referred to as serial correlation. It is the
relationship, not between two (or more) different variables but between the successive
values.
2.8.6 Sources of AutoCorrelation
1. Mis-specification of the form of the model:
If we have adopted a mathematical form, which differs from the true form of the
relationship, there may show serial correlation. For example if we have chosen a linaer
function while the true relation between Y and Xs is of cynical form, the values of e will
be temporarily independent.
2. Omitted explanatory variables:
If auto correlated explanatory variables such as cyclic variables are omitted or excluded
from the regression model then they are absorbed in the error term,, which will then be
also be auto correlated.
3. Misspecification of the true random term :

It may well be expected in many cases for the successive values of the true e to be
correlated.

18

2.8.8 Assumptions
In the regression context the classical linear model assumes that autocorrelation does not
exist in the disturbances, , (error term) that is E (ei, ej) 0 for i j. If there is
dependence we have autocorrelation that is E (ei, ej) 0 for i j.
2.8.9 Hetrocedasticity
This is a situation where the variance of the error terms are unequal. The presence of
Hetrocedasticity in the model implies the following:
-There is an interaction effect between a measured independent variable and an
unmeasured independent variable not in the model or some independent variables are
skewed while others are not.
-Error variance 2 is underestimated by the ordinary least squares estimation.

-Te estimated model has low forecasting.

Therefore whenever there is autocorrelation and heteroscedasticity in error terms all
inference, namely estimation, hypothesis testing and forecasting must take into account
the above effects for the conclusions to be valid. When hetroscedasticty is identified on
the basis of any test, the appropriate solution is to transform the original model in such a
way as to obtain a form that has a constant variance. The adjustment of the model
depends on the form of the relationship between the variance and the values of the
explanatory values = F(x).

19

In general the transformation of the original model consists of dividing the original
relationship by the square root of the term responsible for hetroscedasticity.
2.9 Causes of Hetroscedasticity
1. Mis-specification:
Hetroscedasticity due to misspecification by exclusion of important variables, or by
assuming a linear relationship when in fact a non-linear relationship exists is quite
common. The solution to the problem is simply correcting the specification.
2.Data Treatment:
Data manipulation such as data aggregation and grouping techniques tend to produce
marked heterogeneity.
3.Data collection procedures:
Sampling procedure such as cluster sampling can easily generate unequal variances.
4. Administratve interference:
Sometimes statistical data is interfered with so that some figures are changed so as to
make them appear larger or smaller than what they really are. Satistical acts and their
enforcements can result in marked difference in data, especially for data collected
within different periods. Therefore it is not always safe to assume that error terms are
homogeneous over all economic units being observed.

20

2.10 Multicolinearity
This is the presence of linear relationship among the explanatory variables. As a result of
the stochastic nature of most regressors correlation and interrelationships are bound to
exist among them making multicollinearity inherent in most explanatory variables. It has
the effect of making the normal equation X1X = X1Y indeterminate, that is it, becomes
impossible to obtain numerical values for parameter and the least squares method
breaks down since the moment matrix X1X is then singular or non invertible. When any
two explanatory variables are changing nearly the same way it becomes extremely
difficult to establish the influence of each one regressor, say Xi on the dependent variable
Y separately. The presence of multicollinearity can be detected by analyzing the
regression results for:
a) Standard errors of parameter estimates
b) High partial correlation
c) High R squared statistic which measures the proposition of variation caused by
the model in cases where R2 = Regression sum of squares (SSE)/Total sum of
squares (SST). If R2 is in excess of 0.8 the F test in most cases will reject the
hypothesis that the partial slope coefficients are simultaneously equal to zero, but
individual t-tests will show that non-or very few of the partial slope coefficient are
statistically different from zero.
d) Low t statistic values

21

e) Sensitivity of parameter estimates-if a few observations are dropped and reestimation of the model yields significantly different parameter estimates this
could indicate the presence of multicollinearity.
2.10.1Causes of Multicollinearity
1) Use of lagged variables
The use of lagged variables such as Yt-1 regressors is now common in many studies
and has generally given satisfactory results in many researchers. However the risk of
introducing multicollinearity is higher when these lagged variables are used. Thus
caution must be exercised whenever lagged variables are used.
2) Co-integration
This is where economic variables move together over time and apparently is the main
cause of multicollinearity. Economic variables are often influenced by the same
factors so that the variables show the broad pattern of behaviour over time. For
example, economic booms affect a number of economic variables, which then tend to
change, that is the increase or decrease together although some variables may lag
behind (or lead) other.
3) Lack of experimental control
Lack of experimental control, in particular administrative interference

is a

fundamental cause of multicolinearity.

22

4) Statistical procedures statistical procedures such as data smoothing, sampling

procedures, can also lead to multicolinearity.
2.11 Solution Techniques
There are various methods that can be used to derive estimates of economic relations
from statistical observations. A statistical approach called Multiple Regression is
employed in deriving the model and subsequent determination of house prices. It is
concerned with the construction of statistical models in which one variable, the variable
of interest is described in terms of other variables of the system.
2.12 Steps in Model Building
There are four stages involved in model formulation. These are model specification,
model estimation, diagnostic checking and inference.
1) Model Specification
Specification of the model in which one will attempt to measure the phenomenon being
analysed (formulation of the maintained hypothesis), statistical theories and graphical
plots are used to identify a tentative model, though they are subject to misspecification
errors. The process of model specification involves the determination of:
a)
b)

The dependent and explanatory variables to be included in the model.

The a-prior theoretical expectation about the sign and size of the parameters of

the function.

23

c)

The mathematical form of the model be it linear or non linear (scatter plots are

used to determine the form)

2) Estimation
After the formulation of the model, estimates of its parameters by appropriate means are
found.
3) Diagnostic Checking
Once the model has been estimated, its adequacy should be evaluated using statistical
tools such as goodness of fit tests, general likelihood tests and the Bartletts tests before
inference such as forecasting can b done.
4) . Inferencing
The final stage is concerned with making inference and or evaluation of the forecasting
validity of the model. The models forecasting power must be tested before the model can
be used to make real forecasts
2.13 Checking the assumption of the regression method
Regression diagnostics are techniques that are employed to check if the assumptions are
not violated and to assess the accuracy of the computations of regression analysis.
Checking the behaviour of the residuals usually does these diagnostics.

24

2.14 Testing The Parameters of the Model

After estimation the parameters of the model are tested for their adequacy and
mathematical plausibility. There are several tests that can be used and the choice of the
test is usually determined by the ease to use the test and relevance of the test to the
model. The tests to be used in the project are as follows:
1) Wald Test
This test is used to test if there is any linear relationship between variables. This test is
available on E-Views Software package. The test is conducted under the following
hypothesis:
H0 : = 0 Vs H1 : 0
H0 is rejected when the given probability is equal to zero and if the chi-squared and the
F-values are the same.
2.15 Model Appropriateness
In testing the parameters we wish to show that there is a linear relationship between the
dependent variable and the independent variables. There is therefore need to assess the
quality of the model fit and the criteria for judging the appropriateness of a model can be
done using the models below.

25

2.16 R2 Coefficient of Determination

The coefficient of determination is the proportion of variability that is accounted for by
the simple regression line. It measures the contribution of regressor variables in
determining the response variable. It is a scale free number that measures the strength of
the linear relationship between the dependent and the independent variable. It can be
measured using the formula below
R2 = SSR/SST------------------- equation (1)
2.17 Correlation
Correlation is a method used to make inferences about the degree of linear and associated
between two random variables X and Y when they have a joint distribution. The
parameters of the distribution are the product moment correlation coefficient or just the
Correlation Coefficient. It is a dimensionless quantity that lies between 1 and +1
inclusive.
2.18 Root Unit Test
Theoretical background for Augmented Dickey-Fuller (ADF) Test
To illustrate the Dickey Fuller tests, consider first an AR(1) process:
Y = + Yt-1+t
Where and are parameters and is assumed to be white noise. Y is a stationary series if
-1<>1. If =1, y is a non-stationary series (a random walk with drift), if the process is

26

started at some point, the variance of y increases steadily with time and goes to infinity. If
the absolute value of is greater than one, the series is explosive. Therefore the
hypothesis of a stationary series can be evaluated by testing whether the absolute value of
is less than one. Dickey-Fuller tests the unit root as the null hypothesis H0 : =1.Since
explosive series do not make much economic series, this null hypothesis is tested against
the one- sided alternative H1: <1. The test is carried out by estimating the equation:
Y = ++Yt-1+t
Where = -1 and t are error terms
While it may appear that the test can be carried out performing a t-test on the estimated,
the t-statistic under the null hypothesis of a unit root does not have the conventional t
distribution. Dickey and Fuller showed that the distribution under th null hypothesis is
non-standard, and simulated the critical values for the selected sample sizes. More
recently, McKinnon (1991) has implemented a much larger set of simulations than those
tabulated by Dickey and Fuller. In addition, McKinnon estimates the response surface
using the simulation results, permitting the calculation of Dickey Fuller critical values
for any number of rights hand variables. The simple unit root test described above is
valid only if the series is an AR (1) process. If the series is correlated at higher order lags,
the assumption of white noise disturbances is violated.
An important result obtained by Fuller is that the asymptotic distribution of the t statistic
is independent of the number of lagged first differences included in the ADF regression.
Moreover, while the parametric assumption that y follows an autoregressive (AR) process

27

may seem restrictive, Said and Dickey (1984) demonstrated that the ADF test remains
valid even when the series has a moving average (MA) component, provided that enough
lagged difference terms are augmented to the regression.
2.18 Goodness of fit in multiple regression
In multiple regression, this is determined by working out a value for R2. However, every
time we add another independent variable, we necessarily increase the value of R2.
Therefore, in assessing the goodness of fit of a regression equation, we usually work in
terms of a slightly different statistic, called R2-adjusted or R2adj. This is calculated as
R2adj = 1 - (1-R2)(N-n-1)/(N-1)
where N is the number of observations in the data set and n the number of independent
variables or regressors. The F statistic is also another way of assessing goodness of fit in
multiple regression.

2.19 Prediction
Regression equations can also be used to obtain predicted or fitted values of the
dependent variable for given values of the independent variable. If we know the values of
x1, x2, ... xn, it is obviously a simple matter to calculate the value of y which, according
to the equation, should correspond to them: we just multiply x1 by b1, x2 by b2, and so
on, and add all the products to a. We can do this for combinations of independent
variables that are represented in the data, and also for new combinations.

28

CHAPTER THREE
3.0 METHODOLOGY
Introduction
Before conducting the study, the researcher will highlight the research design, the model
to be used and justification of variables. The study makes use of bi-annual data collected
from publications and economic bulletins.
3.1 Justification of variables
a. Inflation

29

Inflation has a direct impact on the stock market performance since investors use the
stock market to hedge against inflation risk. A priori, inflation is negatively related to the
industrial index thereby affecting stock market performance. Higher inflation rate
discourages savings from the money market and investors will flood the stock market
where there are higher and attractive returns. Accordingly, we anticipate the coefficient of
this variable to be negative.
b. Interest rate
Interest is the cost of borrowing or reward of lending money to various economic agents.
Lower intrest rates discourage savings in the money market. This induces investors to
move from the money market to the stock market, as a hedge against inflation. In simple
terms, lower intrest rates discourage investors from saving thus preferring the stock
market. We expect the coefficient to be negative since an increase in intrest rates attracts
investors to the money market and reduces the overall yield in the stock market.

c. Money Supply Growth

The series of broad money supply growth is relatively obtainable and acts as a good
proxy for corporate income streams. Therefore money supply should be included in the
model. As mentioned earlier, Tsuyoshi T (2001) included the variable and it was
statistically significant in his analysis. The sign is expected to be positive. From the
theory the increase in money supply, holding interest rates constant, will compel investors
to demand more of products and this includes short-term investment portfolios in equities
d. Economic reform

30

Structural adjustment programmes affect the allocation and distribution of resources in

any economy. Financial and Economic Deregulation that was experienced 1991/2 set a
plethora of swings in the stock market as well as the stock market at large. The causality
of such variables to explain their correlation will not suffice unless the econometric
model incorporates this variable. Macroeconomic management is in tandem with
Economic Reform Policies adopted by the state. A priori, we expect the coefficient to be
positive.
3.2 Data sources and types
Most of the data used I this report is purely quantitative secondary semi-annual data
extracted from various publications. The research pertains to Zimbabwe for he period
1990 to 2004. Since the variables to be investigated on are macroeconomic fundamentals,
the main source of the data central authorities of public institutions and state departments.

Sources of data include:

RBZ semi-annually reports, 1990-2004
CSO publications
Newspapers
Reports from Financial Institutions
3.3 Methodology
Data was analyzed by the OLS Method. The statistical package that was used fit the
regression model for the data was E-views. To avoid understatement of the model, this
piece of work has incorporated 4 (four) economically sound and quantitative variables

31

relevant in the determination of the industrial index as evidenced by the various financial
journals. This project included an aggregated index of eco-political factor as a dummy
variable for the industrial index calculation.
3.4 Mathematical tools
The Ordinary Least Square method was employed to produce the results outlined in the
next chapter. Diagnostic tests were also run on the model.
3.5 Model Specification
Having noted the above literature review, the researcher estimated an econometric model
using ordinary least OLS. The regression model is built by setting the industrial index
(dependant variable) and the following explanatory variables: inflation, intrest rates (TB
rates), Money Supply Growth (M3).
IND = 0 + 1MSG + 2INFL + 3INT + 4 DUM
Where:
IND = Industrial Index Growth
INFL= Year on year inflation as measured by all items CPI
INT = Money Market Rate as measured by the 91 day Treasury Bill discount discount
rate
MSG= Broad Money Supply Growth (M3) rate
DUM= Dummy variable for the presence of Economic Reforms.
3.6 Diagnostic checking
After the model was estimated, its adequacy had to be evaluated before the model can be
used for forecasting purposes. The tests that were done included.
Unit Root Test (Dickey Fuller)

32

 Autocorrelation Test
Walds Test for coefficients
Multicollinearity
3.7 Inference
The last chapter concerns the making of inference and evaluation of the validity of the
model.

CHAPTER 4
4.1 DATA ANALYSIS AND RESULTS PRESENTATION
This chapter highlights the findings of the research. The selected data summarized in
appendix A were processed using E-views. The chapter focuses on model estimation and
interpretation of the significance of the model. Simple modifications such as differencing
were employed in the bid to improve the quality of the results.
4.2 Tests for stationarity
In this section I used unit root tests with E-views to check stationarity of the four
variables. As shown below the Industrial Index (IND) was stationary at level data,

33

INFL, INT and MSG were stationary at first difference. Shown below are the results of
the Augmented Dickey-Fuller (ADF) tests

4.2.1 ADF Tests

IND
ADF Test Statistic

4.918538

1% Critical Value*
5% Critical Value
10% Critical Value

-2.6453
-1.9530
-1.6218

ADF Test Statistic

-1.231238

1% Critical Value*
5% Critical Value
10% Critical Value

-2.6453
-1.9530
-1.6218

1ST DIFF ADF Test

Statistic

-2.733962

1% Critical Value*

-2.6486

5% Critical Value
10% Critical Value

-1.9535
-1.6221

INFL

INT
ADF Test Statistic

-1.696735

1% Critical Value*
5% Critical Value
10% Critical Value

-2.6453
-1.9530
-1.6218

1ST DIFF ADF Test

Statistic

-1.696735

1% Critical Value*

-2.6453

5% Critical Value
10% Critical Value

-1.9530
-1.6218

MSG
ADF Test Statistic

-0.620228

1% Critical Value*
5% Critical Value
10% Critical Value

-2.6453
-1.9530
-1.6218

1ST DIFF ADF Test

Statistic

-3.461148

1% Critical Value*

-2.6486

5% Critical Value
10% Critical Value

-1.9535
-1.6221

34

4.3 Estimation and results

After determining the stationarity of the variables, the researcher went on to use the
stationary data to come up with the following results.

Variable
C
INFL
INT
MSG
DUM
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

Coefficient
-1016.998
4.545173
10.10454
35.81166
-751.2113
0.980273
0.945117
957.4691
22918679
-245.7621
1.665227

Std. Error
t-Statistic
462.9789 -2.196639
2.095025
2.169508
2.477897
4.077869
11.90065
3.009219
535.0004 -1.404132
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)

Prob.
0.0375
0.0398
0.0004
0.0059
0.1726
1353.177
1896.506
16.71748
16.95101
22.19439
0.000000

Estimation Command:
=====================
LS IND C INFL INT MSG DUM

Estimation Equation:
=====================
IND = C(1) + C(2)*INFL + C(3)*INT + C(4)*MSG + C(5)*DUM

Substituted Coefficients:
=====================
IND = -1016.997748 + 4.545172598*INFL + 10.10454139*INT + 35.81166028*MSG 751.2113478*DUM

35

4.4 Discussion of results

The following results (as shown) in the table above generated by E-views are shown in
summary for easy interpretation;
R2= 0.980273
Adjusted R2= 0.945117
Durbin- Watson Stat= 1.765227
F- Statistic= 22.19439
Prob (F-Stat ) = 0.000000
Because the model has a good explanatory power the researcher saw it fit to interpret the
results.
4.5 Partial Regression Coefficients
0 = -1016.996; this implies that holding all other factors constant, the industrial index
will decline by 1016.996. The interpretation of the intercept holds no water as it is an
arbitrary variable.

1 = 4.545173; holding all other variables constant, 1% increase in inflation would result
in 4.55% increase in the industrial index growth. As inflation increase, stock market
performance improves as well.

2 = 10.10454; this means that with all other factors held constant, we should expect a
percentage increase in intrest rates to invoke a 10.1% increase in the industrial growth
index.

36

3 = 35.8166; Ceteris paribus, a single percent point increase in money supply growth
has a significant 35.82% increase in the industrial index growth. This is why the Central
Bank is battling to keep the market short so as to decrease the inflated capitalization of
the stock market.

4.6 Statistical significance of the coefficients

The t-statistic for the coefficients of the model are above the critical value ttables=2. this
means that, we reject the null hypothesis and that the population value of the relevant
coefficients is zero. In other words the model specified above is a true approximation of
the true population model.
4.7 Overall significance of the model
From the F-statistic, Fcalc Ftables at 5% level of significance. We can therefore
conclude that the overall model is statistically significant.
4.8 Explanatory power of the model
Using the model above, Adjusted R2 value of 0.945117 shows that the variation in the
explanatory variable accounted for over 90% in the variation in the dependent variableindustrial index growth. This shows that the model has a very high explanatory power.
The model is reliable in estimating the stock market performance.

4.9 Testing for Autocorrelation (The Durbin Watson Test)

A Durbin Watson statistic is used to test for autocorrelation. Since it is approaching 2, it
implies the absence of autocorrelation.

37

4.10 The Augmented Dickey-Fuller Test Equation for Stationarity

The Augmented Dickey-Fuller Test Equation for Stationarity showed that all the
variables, the Interest rate, money supply growth and inflation, except industrial growth
index were non-stationary variables at their levels. These variables only become
stationary on first differencing. In other words these variables are all integrated of order
one.
4.11 Diagnostic tests
4.11.1 Multicollinearity tests
Its presence is evident in the model because of the high R-squared value.
4.11.2 Autocorrelation test
A Durbin Watson statistic is used to test for autocorrelation. Since the Durbin Watson
statistic= 1.665227 is closer to 2 (critical value), it implies the absence of autocorrelation.
4.11.3 Tests for coefficients (Walds Test)
Significance of the coefficients was done using the Walds test where:
H0: i = 0

vs

H1: i 0

Rejection criteria
We reject H0 when the probability is less than the size of the test, which is 0.05

Table: Significance of the constant coefficient

Wald Test:
Equation: Untitled
Null Hypothesis: C(1)=0
F-statistic
4.825225
Chi-square
4.825225

Probability
Probability

0.037536
0.028046

38

We reject H0 and conclude that the constant coefficient is statistically significant at 1%

level.
Table: Significance of the coefficient for INFL

Wald Test:
Equation: Untitled
Null Hypothesis: C(2)=0
F-statistic
4.706764
Chi-square
4.706764

Probability
Probability

0.039754
0.030044

We reject H0 and conclude that the coefficient for INFL is statistically significant at 1%
level.

Table: Significance of the coefficient for INT

Wald Test:
Equation: Untitled
Null Hypothesis: C(3)=0
F-statistic
4.706764
Chi-square
4.706764

Probability
Probability

0.039754
0.030044

We reject H0 and conclude that the coefficient for INT is statistically significant at 1%
level.

Table: Significance for the coefficient for MSG

Wald Test:

39

Equation: Untitled
Null Hypothesis: C(4)=0
F-statistic
16.62902
Chi-square
16.62902

Probability
Probability

0.000406
0.000045

We reject H0 and conclude that the coefficient of MSG is statistically significant at 1%

level.

Table: Significance for the coefficient for DUM

Wald Test:
Equation: Untitled
Null Hypothesis: C(5)=0
F-statistic
9.055397
Chi-square
9.055397

Probability
Probability

0.005906
0.002619

We reject H0 and conclude that the dummy variable was economically sound in the
determination of the industrial index

4.13 Goodness of Fit Test

The model has a good explanatory power as shown by a coefficient of determination, Rsquare of 0.98, thus 98% of variations in IND is explained by the model. Adjusted R2
indicates that after taking into account the degrees of freedom, the model explains about
94% of the variations. The F-statistic is large enough to indicate that the model is a good
fit.
4.14 testing the validity of the regression assumptions

40

80

Series: Residuals
Sample 1995:01 2005:06
Observations 126

60

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

40

20

Jarque-Bera
Probability

2.61E-09
-233973.0
19126752
-21561656
3693888.
-0.325627
1.53255
3.00001
0.756000

0
-2.0E+07

-1.0E+07

0.00000

1.0E+07

2.0E+07

Figure 4.1 Histogram of residuals

The histogram paints a normal distribution between variables. This is a sufficient
verification that the residuals are normally distributed with mean zero.

Hypothesis
H0: residuals are normally distributed
H1: Residuals are not normally distributed
Test statistic:
Jarque-Bera = N-k S2 + 0.25(K 3)2 2 2(0.05)
Rejection criterion: Reject H0 if the Jarque-Bera > 22(0.05) = 6. JB = 3.00001<6, so we
accept H0 and conclude that the residuals are normally distributed.

41

4.14 Residual Tests

Actual, Fitted, Residual graph
Fig 4.1 Actual, Fitted, Residual graph

8000
6000
4000

4000

2000
0

2000

-2000
0

-2000
90

92

94
Residual

96

98
Actual

00

02

04

Fitted

The above diagram shows a graph for the actual values, fitted values and a graph for the
residuals. Since the actual and fitted graphs are very close, this supports that the model is
a good fit of the observed values.

42

4.15 Forecasting
Industrial index forecast
Fig 4.2 Forecasting graph for Industrial Index

10000

Forecast: INDF
Actual: IND
Sample: 1990:1 2004:2
Include observations: 30

8000
6000

Root Mean Squared Error874.0457

Mean Absolute Error
505.3237
Mean Abs. Percent Error 311.4902
Theil Inequality Coefficient
0.197054
Bias Proportion
0.000000
Variance Proportion 0.061948
Covariance Proportion
0.938052

4000
2000
0
-2000
-4000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
INDF

2 S.E.

4.15.1 Co-integration
This is a test where we check for the stationarity of the residuals at their level using the
usual unit root test. When co-integration exists then there is a long run relationship
between the variables under study and the model is rendered to give reliable forecast
estimates.
Now the results from E-views analysis are as follows:
Table: ADF test for stationarity of residuals (RESID)
-4.562398

1% Critical Value*

-2.6453

5% Critical Value
10% Critical Value

-1.9530
-1.6218

ADF Test Statistic

The residual are stationary at their level, indicating clearly the existence of co-integration.
Thus the forecast values obtained from using the model are statistically and economically
reliable for the long run.

43

4.16 CONCLUSION
From this estimation, it can be seen that there exist a positive relationship between
growth in the industrial index and inflation rate. However, a priori, states that for the
industrial index to grow inflation rate should be relatively low or decreasing.
Nevertheless as mentioned in literature review, inflation rate usually drives investors
away from the money market into the stock market where returns are positive in real
terms. High inflation rates affect the money market rates.

44

CHAPTER FIVE

5.1 FINDINGS AND CONCLUSION

The empirical analysis conducted suggests that money supply growth, inflation have
positive relationship and the presence of economic reforms seem to have negative
relationship. The most paradoxical result is inflation. Although literature suggests that
there is negative relationship between inflation and the performance of the stock
exchange, this study has shown that there is an opposite relationship. As inflation
increase, so does the equities market. Other variables were in line with a priori
expectations.
The reason behind such a paradoxical result stems from the fact that the industrial index
was driven by asset managers who hedged against inflation with an above normal
appetite for the blue chip counters. Financial counters were performing well-above
market expectations because of their reported supernormal profits without any positive
correlation in an ailing economy. This was driven by asset bubbles in the financial sector
counters at the expense of other counters. Banks were engaged in non-banking activities
and used their holding companies to penetrate the black market foreign exchange system
and properties market. Since such activities inflated banks balance sheets, the investor
market circumvented loss-making equities in favor of financial counters. This created
excessive demand for the counters as investors and speculators alike were flooding the
market.

45

Excess money supply also drove the stock market to record highs. The Reserve Banks
Productive sector Facility was proxy of M3 growth in the financial system. The
researcher analyzed the trend of money supply growth with stock market performance
and it was noted that nominal monetary balance issued through the PSF to ailing
manufacturing and agricultural sectors were being channeled back to the financial system
for speculative investment in the equities market.
In a realistic case, some companies applied to the Reserve Bank of Zimbabwe (RBZ) for
the cheap funds under the PSF, which was issued from the banks statutory reserves.
The companies would be issued with these funds under the auspice of acquiring raw
materials and spare parts, which are in most cases, were imports (which in turn required
foreign currency from the RBZs Auction system). Whilst the RBZ is mulling on whether
or not to grant them approval for the purchase of these equipment, they would invest
these funds by speculating on the stock market. This led to a formidable performance on
the stock market since stock markets received much liquidity. Whilst policy makers strive
to ensure transparent and proper use of these funds are being made, some unscrupulous
businesses were using the Reserve Banks PSF money to fund its large portfolios in the
equities market spearheaded by asset managers and speculators.
Interest rates are the underlying pricing mechanism on the stock market performance. If
the TB rate is increased, for example, investors are pushed away from the stock market in
favor of the lucrative money market. Risk averse investors would diversify their
portfolios in order to hold on attractive investment with minimal default (i.e buying
TBs). This implies that there is a negative relationship between intrest rates and the stock
market performance. The central bank on several occasions had to re-align intrest rates

46

with inflation differentials in an attempt to curb speculative activities in the equities

market. This policy is double edged since on one hand it reduces activity on the stock
market but on the other the intrest bill bourne by the government would be extremely
elevated. This meant that the budget deficit would widen in the back demand for Treasury
Bills. Therefore a policy mix should be implemented, where the central bank weighs the
costs and benefits of reducing stock market performance with the purpose of channeling
these excess funds for productive use or putting the countrys government on pressure to
curb short term obligations (the 91 day intrest bill) through issued TBs given the
inflationary pressure in Zimbabwean economy. This introduces more problems for
government such as how to restructure the domestic debt in order to minimize the shortterm obligations and bias it more to long term paper.
The Governments stance to relax their control of interests had severe repercussions on
stock market performance since the majority of the players were institutional and
international investors. The deregulation introduced severe competition to attract such
investors in conjunction with the prejudicial timing of the reform. Instead of a boom in
the stock market performance there was capital flight from the bourse to other investment
hubs in the SADC region. Another of such economic reforms also supported this was
promulgated in 2000: the Millemium Recovery Plan, this heralded the formulation and
implementation of NERP and ZIMPREST. This was compounded with the land reform
exercise, which affected the distribution of people and resources. The government under
took a hurried reform package, which was not supported by appropriated fiscal and
monetary policy. The random occupation affected the countrys reputation as a haven for
international capital flow.

47

Accordingly, economic reforms can make or break stock market performance. This
suggests that if such reforms are executed properly, the economy can enhance its national
savings. These may perhaps be supplemented by capital from other international
investors. However, if implemented without prior synchronization with other sectorial
reforms, as to the course of the economy, reforms could spell disaster for stock market
performance.
5.2 Policy Implications and Recommendations
From the analysis of results, drought seemed to have significant effects on the value
of stock prices. Hence policy makers should intensify efforts to increase capacity of
irrigation systems and dams as reservoirs to hedge against times of drought.
Since drought is not a controllable variable, the government should made available
and encourage farmers to grow drought resistant crops to reduce supply side shocks.
The Reserve Bank of Zimbabwe can determine the level of intrest ratestaking into
consideration the performance of the stock market. However, low interest rates lead
to low savings and this eventually leads to a decline in investment.
Money supply growth is positively related to the industrial index and inflation. Hence
for the growth in the money supply to cause growth in the industrial index without
fuelling inflation, the RBZ will need to calculate the magnitude of money supply
growth that can increase the industrial index without triggering inflation.
The RBZ should offer positive real interest rates when increasing money supply in
order to minimize demand-pull inflation.

48

The results actually appreciate the fact that certain percentage changes in stock prices can
be as a result of other factors which have not been captured like political stability,
unemployment and budget deficit. For instance the unpredictable contains of the National
Budget and Monetary Policy Statement can also cause a downward movement of stock
prices. However the rapid increase in stock prices is consistent with historical nexus
between stock returns, money supply and interest rate.
5.3 Issues for further study
The study focused on the determinants of stock prices basing on the changes in the
macroeconomic variables. Currently in Zimbabwe the exchange rate is not consistent
since there are more than two exchange rates that are operating. This inconsistence makes
it difficult to measure exchange rates against the industrial index, hence the need for
further study on exchange rates in relation to stock prices. Moreover inflation in this
study was significant and is the countrys worst enemy, making it imperative for further
investigation.
5.4 Conclusion
This study analyzed the impact of macroeconomic fundamentals on stock market
performance. This has underscored the various economic agents in place to explain the
trend in stock market performance. In such a context, the relationship is valid given the
nature of Zimbabwes economy. However, it should be noted that, such a relationship is
rhetoric and it is an irrational exuberance (unreasonable enthusiastic performance) as
mentioned by Allan Greenspan (US Federal Reserve Bank Chairman).

49

Appendix 1: Sample Data

IND
1990:1
1990:2
1991:1
1991:2
1992:1
1992:2
1993:1
1993:2
1994:1
1994:2
1995:1
1995:2
1996:1
1996:2
1997:1
1997:2
1998:1
1998:2
1999:1
1999:2
2000:1
2000:2
2001:1
2001:2
2002:1
2002:2
2003:1
2003:2
2004:1
2004:2

60.3
100
61.6
91.2
15.6
17.1
37.8
90.1
127.1
135.8
147.6
140.2
310.1
472.9
581.9
666.6
355.8
398.1
553.4
603.1
944.1
1102.8
2326.3
2994.7
3172.1
4212.5
4343.3
4772.9
4886.1
6874.2

INFL
15.5
20.2
23.3
30.9
42.1
26.1
27.6
28.1
22.3
22.5
22.6
21
21.4
30.1
18.8
19.9
31.7
26.3
58.5
59.4
55.9
63.5
64.4
117.8
198.9
234.5
364.5
598.7
394.6
132.8

INT

MSG
11.75
11.75
14.75
15.8
34.6
35.1
37.9
38.2
36.4
36.4
35
37.1
33.6
32.1
34.7
41.3
49.3
55.5
66
57.2
57.5
40.3
31.3
30.2
15.5
15.3
26.4
30.1
450
270

19.1
20.1
20.4
21.3
22.9
35.2
43
45.6
34.3
32.1
30
29.1
27.7
28.9
34.9
34.3
14
14.9
29.8
35.6
60.8
65.6
73.4
75.7
78.4
80.8
83.5
84.1
40.95
24.07

DUM
0
0
0
0
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
1
0
0
0
0
0
0
0
0

50

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