Abstract
This paper seeks to examine the dynamic causal relations between the two major financial assets, stock prices of the US and South Africa and the rand/US$ exchange rate. The study uses a mixed bag of time series approaches such as cointegration, Granger causality, impulse response functions and forecasting error variance decompositions. The paper identifies a bi-directional causality from the Standard & Poor’s 500 stock price index to the rand/US$ exchange rate in the Granger sense. It was also found that the Standard & Poor’s stock price index accounts for a significant portion of the variations in the Johannesburg Stock Exchange’s All Share index. Thus, while causality in the Granger sense could not be established for the relationship between the price indices of the two stock exchanges it can argued that there is some relationship between them. The results of the study have implications for both business and Government.
Highlights
Even though the size of the South African equity market is quite small compared to that of the US there appear to be some interactions among participants of the two markets
The results suggest that the null hypothesis of the presence of unit root in the variables in levels could not be rejected, indicating that all the variables are non-stationary in levels
This paper seeks to examine the empirical relationship between the rand/US$ exchange rate and the stock prices of South Africa and the US
Summary
Even though the size of the South African equity market is quite small compared to that of the US there appear to be some interactions among participants of the two markets. Unlike South Africa the US has several stock exchanges with the biggest being the NYSE1, followed by the NASDAQ2. Domestic market capitalisation of the NYSE and NASDAQ were 15.4 trillion and 3.9 trillion US dollars respectively at the end of 2006 (WFE, 2007). The Johannesburg Stock Exchange (JSE) on the other hand is ranked 18th in the world with a market capitalisation of US$711bn. Despite the relatively high market volatilities in emerging markets, investors from the less volatile markets of the developed world continue to diversify their investments by including equities from emerging markets such as South Africa in their portfolios
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