A causal relationship between derivatives trading, capital market development and economic growth: Evidence from South Africa

Abstract

This article is based on empirical research on the relationship between derivatives and capital market development and also between derivatives and economic growth on the Johannesburg Stock Exchange (JSE) for the period between 1994 and 2012. The study employed the Autoregressive Distributed Lag (ARDL)-bound testing approach and the Granger causality tests to examine the linkage between capital market development and derivatives, and the nexus between derivatives and economic growth to capture the short-run and long-run dynamics. The results show that there is a significant relationship between derivatives and capital markets development. Further tests indicated that there is a unidirectional Granger causality running from capital market development to derivatives both in the short run and long run, implying that derivatives do not Granger cause capital market development. Results also revealed that there is no direct linkage between derivatives and economic growth. Based on the research it is recommended that further research should be conducted to investigate how derivatives enhance capital market development through augmentation of liquidity and efficiency, leverage, and reduction of transaction costs through the role of derivatives as risk management tools in capital markets.