On-line version ISSN 1015-8812
S. Afr. j. econ. manag. sci. vol.13 n.3 Pretoria Jan. 2010
Matthew Kofi Ocran
Department of Economics and Economic History, Nelson Mandela Metropolitan University
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.
Keywords: Exchange rate, cointegration, stock price, impulse response, variance decomposition and Granger causality.
JEL: G15, F31
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Accepted May 2010
1 The NYSE is also the biggest exchange in the world while the NASDAQ is in 3rd position in terms of market capitalisation.
2 NASDAQ stands for National Association of Securities Dealers Automated Quotations system; founded in 1971 it is the world's first electronic screen-based stock market; the NASDAQ exchange is uniquely dominated by technology stocks (NASDAQ, 2007).
3 This is defined as the total number of issued shares of domestic companies, including their several classes, multiplied by their respective prices at a given time. This figure reflects the comprehensive value of the market at that time (WFE, 2007).
4 The number three represents the number of variables in the present study.
5 The other major stock indices in the US are:
6 (1) Dow Jones Industrial Average (stocks of 30 large firms in the US - popular indicator;
(2) NYSE Composite Index (all companies listed on the NYSE);
(3) Nasdaq Composite Index (all companies quoted on the NASDAQ; technology-heavy);
(4) NASDAQ-100 Index (100 large NASDAQ stocks from the non-financial sector);
(5) S & Poor (500 large companies often used for general market analysis); Russell 2000 (small-cap stocks) and the Wilshire 5000 Index (represents US market).