Assessing the stock market wealth effect in South Africa

This paper assesses the long-term relationship between consumption spending and stock market wealth in the context of the life-cycle hypothesis in South Africa. A distinction is made between the expected and unexpected changes in stock market wealth and their effects on consumption spending. The Johansen and the dynamic ordinary least square (DOLS) cointegration methods are used to assess the long-term relationship between consumption spending and stock market wealth, and thus the effect of the expected change in stock market wealth on consumption spending. Moreover, the impulse response function obtained from the identified vector autoregressive model (VECM) is used to assess the impact of the unexpected or shocks to stock market wealth on consumption spending. The results of the paper show a small positive reaction of consumption spending to expected and unexpected changes in stock market wealth in South Africa. The paper attributes this weak reaction of consumption spending to stock market wealth to the possibility of small participation of households in stock exchange investment opportunities in South Africa.