Abstract
This paper examines the presence of cointegration between South African gold mining index and USD/ZAR exchange rate. The results show that gold index and USD/ZAR exchange rate series are both I(1) and are cointegrated. The Granger causality test shows a two-way directional causality between gold index and USD/ZAR exchange rate for the period 9 June 2005-9 June 2015. By accounting for possible structural breaks, the Zivot-Andrews unit root test suggests two different breaking points in the data. By using the breaking dates to divide the dataset into 3 sub-periods, the results show that gold index and USD/ZAR exchange rate series are not cointegrated. The Granger causality test shows no causality between the two variables. This finding suggests that gold mining index does not play a key role in explaining the trends in the exchange rate and likewise exchange rate does not affect gold mining index. Keywords: USD/ZAR exchange rate, gold mining index, unit root tests, breaking points, cointegration. JEL Classification: F3, F4, F63, O47
Highlights
South Africa’s international competitive status is considered key when evaluating its efforts of achieving major macro-economic objectives
The focus of this paper was to assess the existing evidence of causal interdependence between daily gold mining index and US Dollar (USD)/ZAR exchange rate when accounting for structural breaks
This result confirms the results by previous studies (Arezki et al, 2014; Bhunia & Pakira, 2014; Rogoff and Rossi, 2015) the vector error correlation model (VECM) indicates that the long-run relationship between GMIt and USD/ZARt does not exist at 5% level of significance
Summary
The Augmented Dickey-Fuller (1979) test (ADF) is the most commonly used unit root test in applied statistics It does not account for structural breaks which are common in long-span time series (Chen and Saghaian, 2015; John et al, 2007). The ADF test is biased towards non-rejection of the null hypothesis if there is a structural break in a stationary time series (Perron, 1989). Banerjee et al (1992), Perron and Vogelsag (1992), Perron (1997), Lumsdaine and Papell (1998) and Zivot-Andrews (1992) are some of the unit root tests which account for structural breaks in the span of the time series. If cointegration between the two variables under study does not exist, the standard Granger causality approach can be employed without including the error correction term (ECTt-1) (Granger, 1969). The impulse responses trace out the response of current and future values of each of the variables to a one-unit increase in the current value of one of the VAR innovations, assuming that this innovation returns to zero in subsequent periods and that all other innovations are equal to zero
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