[15- Saba Hashim]

In the development of an economy of a country stock market plays a vital role. The economy consists of
microeconomics and macroeconomics indicators. Microeconomics deals with the study of economics at a
smaller scale along with the behaviour of individuals and companies within the economy. While
macroeconomics deal with the study of economics on broader scale and examines the overall conditions within
the economy. Here we will discuss the macroeconomics indicators which includes interest rate, monetary policy,
term of trade, GDP, consumer price index, production price index, inflation rate, discount policy etc. The second
thing which is discussed in this paper is the stock return for this purpose we considered the financial markets
where short term and long term securities are traded. It is commonly divided into capital and money market.
Stock market is included in capital market for providing long term financing by issuing shares or common stock.
Financial markets basically provide valuable information to the investors including internal and external factors
affecting the stock prices and allowing the investors to take better investment decisions. The information
provided to the investors are through technical and fundamental analysis. In this paper, specifically the stock
market of South Africa and the unpredictable changes in macroeconomics indicators affecting its stock return is
investigated. The most important indicator among the macroeconomics variable is the supply of money
(monetary policy) by affecting interest rate and plays essential role in promoting economic growth and its
stability. And also the movement in stock market is related to the changes in the monetary policy because any
increase or decrease in the supply of money will effect in the change of interest rate. The thing which is most
important for an investor in order to take the profitable investment decision is to have complete knowledge
about the indicators that are the causes of stock price movements and the stock return volatility. Here it can be
indicated that there is cause and effect relationship between macroeconomics indicators and stock return. By
reminding the QTM (quantity theory of money) which says that as the supply of money increases the general
price level also increases indicating an increase in inflation rate, accordingly stock price should decrease. This
paper also highlight this idea in terms of South African stock market, in case of decrease in supply of money the
interest rate increases by increasing the inflation rate therefore the stock prices decrease. The stock prices react
more strongly to the new or unexpected information effecting the monetary policy, instead of being responding
to the information that already exists in the market and its reaction toward the policy is expected. The
unexpected changes in macroeconomics indicators are also known as macroeconomic surprises because
financial market analyst through technical and fundamental analysis forecast the data and on the release of the
actual data then any difference among the expected and actual data is called a surprise it may be in the favour of
stock market or against the stock market. But it is very much important investment decision making. Now
moving toward the South African stock market index responding to the unexpected changes in macroeconomics
indicators known as surprises. To investigate such type of surprise, this paper took data from South African
economy specifically four macroeconomics indicators for January 2009 namely gross domestic product,
producer price index, consumer price index and current account. Through technical analysis the forecasted data
and the actual data was compared to see the difference prevailing among them. When analysing the figure 3
where PPI was taken on y-axis and date on x-axis of producer price index(PPI) then it showed that actual and
forecasted trend lines were same but the surprise line reveals only little variations. For investigating the
monetary policy in terms of surprise figure 5 was constructed by selecting the data because of its availability at
high level of frequency and quality instead of being surveyed. Repurchase rate % was taken on y-axis and the
date on x-axis, and the actual and surprize trend line was viewed. Now coming towards the indices of South
Africa basically it is divided into two categories firstly general indices including ALSI and TOP40 and secondly
industry indices including different financial sectors like banking sectors, insurance companies, investment
companies etc and also general and specific industrial sectors namely defence sector, machinery industry,
mining industry, electrical equipment, chemical industry and electronic industry etc. In this paper time factor is
very important to correctly investigate the movement of surprise trend line against the actual data and the
forecasted data trend line. So, it specifically considered only those dates on which some data relating to
macroeconomics indicators or monetary policy was released that effect the stock market returns and ignore the
other dates that had no effect on the stock market of South Africa. Therefore this paper took the event wise date,
that start from May 2002 to January 2009. Empirically the result of this analysis showed that along with other
macroeconomics indicators the surprise which result from the monetary policy had greater effect on the South
African stock return when we investigated our result in terms of event wise dates. To investigate further, this

paper used the BVAR model which was the Bayesian version that also consider the impact of external source of
macroeconomics unexpected changes in the model. As event wise analysis indicates that stock return and
monetary policy are negatively related. But BVAR model using the monthly data reveals that not only monetary
policy but also the consumer price index and the producer price index surprises at a smaller frequency also had
an effect on the South African stock returns although their horizon is small but quite significant right after the
surprise.