Acta Universitatis Danubius. Œconomica, Vol 13, No 4 (2017)

Abstract

This paper investigates the relationship between the macroeconomic variables, leverage and the stock returns on the Johannesburg Stock Exchange using ARDL bounds testing approach and Vector error correction model. A further analysis on the effects of leverage on volatility was done using a generalized autoregressive conditional heteroscedasticity model (GARCH 1,1). The study revealed that there is co-integrating relationship between macroeconomic variables and stock returns. Particularly, there is a long run relationship between stock returns and real GDP, and also between stock returns and interest rates. Additionally, this paper shows that leverage affects the volatility of stock prices. Finally, it is noted that after disequilibrium the economic model will always adjust to equilibrium at a rate of thirty-three percent within a year. Since leverage positively influence volatility in stock returns investors that are risk averse should avoid highly geared firms.