Analysis of the Linkage between South African’s Exchange Rate and Stock Price Index

Abstract

In this study, we used a wavelet analysis method to analyze how stock price index is correlated with exchange rate in South African stock market andinterest rate was choosen as the control variable. As indicated by the empirical results, first, stock index is significantly correlated with exchange rate in the stock market of South Africa, no matter in the short term (1-4 years) or the long term (4-8 years). There is a significant correlation period, with correlation coefficient greater than 0.8. Second, for the short-term (1-4 years) relationship, after adding control variables, South Africa’s short-term negative correlation will be led by the stock exchange rate. That is, in condition of the negativity of both stock market and exchange rate, the stock market leads. And interest rate greatly affects the short-term (1-4 years) exchange rate and the stock price index in South Africa. And in the short term, the linkage between those two variables is not subject to the influence of 2008 financial crisis. Third, for the long-term (4-8 years) relationship, when we add control variables, regardless of its term, there is a negative correlation between stock market index and exchange rate in South African stock market, and stock market affects exchange rate. The long-term (4-8 years) correlation of stock price index and exchange rate in South African stock market was affected by the 2008 financial crisis. South African market is indeed the goal for investors to participating enthusiastically now. The above conclusions can serve as a lesson for hedging in corporate exchange rate, stock market, and also reference for global investors and all sorts of investor asset allocation.