Abstract
This study explores the relationship between interest rates and stock market returns in South Africa from 2000Q1 to 2023Q3, utilizing the non-linear autoregressive distributed lag (NARDL) model. It incorporates variables such as stock price volatility, market capitalization, exchange rate risk, and inflation to control for potential confounding factors. The findings indicate a significant asymmetric impact of interest rates on stock market returns in South Africa. Specifically, a negative change in interest rates has a more pronounced effect on stock market returns than a positive change. This asymmetry underscores the sensitivity of the South African stock market to shifts in monetary policy. The study reveals a strong long-term relationship between negative stock price volatility and stock market returns, but not in the short run. Positive market capitalization has a smaller impact on stock market returns, while lagged negative market capitalization exerts a stronger effect. Exchange rate risk significantly influences returns in the long run, while negative inflation shocks have a more pronounced short-term impact. This finding has important implications for investors and policymakers seeking to understand the relationship between interest rates and stock market performance in South Africa. Therefore, investors and policymakers should closely monitor changes in monetary policy to anticipate potential impacts on the stock market.