Stock Prices and Exchange Rates Dynamics in South Africa: An application of Asymmetric Co-integration Approach
PDF

How to Cite

ALI, H. S., IDRIS, M., & KOFARMATA, Y. I. (2015). Stock Prices and Exchange Rates Dynamics in South Africa: An application of Asymmetric Co-integration Approach. Journal of Economics Library, 2(3), 165–172. https://doi.org/10.1453/jel.v2i3.429

Abstract

Abstract. We applied asymmetric cointegration approachtoinvestigate the impacts of stock prices on exchange rates in South Africa using monthly data from January 1980 to May 2014. The empirical finding shows that the two macroeconomic variables are cointegrated using traditional Engle-Granger approach. While TAR model shows no element of cointegration, MTAR model revealsthat there is long-run relationshipbetween the variables and they are asymmetrically cointegrated as signifies by both F-equality and F-joint respectively. Using Enders & Siklos (2001) table we reject null hypothesis of no cointegration at 5% significance level. This means that stock prices influences exchange rates in South Africa and the speed of adjustment is non-linear, when share price changes exchange rates equally changes but not in the same proportion with that of share prices. The policy implication is that the authorities in this country should focus more on stabilizing their exchange rates in relation to other major global currencies more especially American dollar. When the value of Rand continues to increase the economy will be less competitive internationally at the same time the value of the stocks might be unattractive even to international investors.

Keywords. Stock prices, Exchange rates, Cointegration, Asymmetric, TAR, MTAR.

JEL. D51, H54, O24.

https://doi.org/10.1453/jel.v2i3.429
PDF

References

Aggarwal, R. (1981). Exchange rates and stock prices: A study of the United States capital markets under floating exchange rates. Akron Business and Economic Review, 12, 7–12.

Ajayi, R.A., Friedman, J., & Mehdian, S.M. (1998). On the relationship between stock returns and exchange rates: Test of Granger causality. Global Finance Journal, 9(2), 241–251. doi: 10.1016/S1044-0283(98)90006-0

Alagidede, P., Panagiotidis, T., & Zhang, X. (2011). Causal relationship between stock prices and exchange rates. The Journal of International Trade & Economic Development, 20(1), 67-86. doi: 10.1080/09638199.2011.538186

Branson, W.H. & Henderson, D.W. (1985). The Specification and Influence of Assets Markets. In: Jones, R. W. – Kenen, P. B. (eds.)’ Handbook of International Economics. Vol. 2. Amsterdam, Elsevier, 1985, pp. 179–201.

Chiang, T.C., & Yang, S.Y. (2003). Foreign exchange risk premiums and time-varying equity market risks. International Journal of Risk Assess. Management, 4(4), 310–331. doi: 10.1504/IJRAM.2003.003828

Dornbusch, R. (1976). Expectations and Exchange Rate Dynamics. Journal of Political Economy, 84, 1161–1176.

Donnelly, R., & Sheehy, E. (1996). The share price reaction of U.K. exporters to exchange rate movements: An empirical study. Journal of International of Business Studies, 27(1), 157–165. doi: 10.1057/palgrave.jibs.8490130

Dornbusch, R., & Fisher, S. (1980). Exchange Rates and the Current Account. American Economic Review, 70, 960–971.

Enders, W., & Siklos, P., (2001). Cointegration and threshold adjustment. Journal of Business and Economic Statistics, 19(2), 166–176. doi: 10.1198/073500101316970395

Engle, R.F., & Granger, C.W.J. (1987). Cointegration and error-correction: Representation, estimation and testing. Econometrica, 55, 251–276.

Frankel, J. (1976). A monetary approach to the exchange rate: Doctrinal aspects and empirical evidence. Scandinavian Journal of Economics, 78, 200–224.

Frankel, J. (1979). On the mark: A theory of floating exchange rates based on real interest differentials. American Economic Review, 69, 610–622.

Frankel, J. (1983). Monetary and portfolio balance models of exchange rate determination. In: Bhandari, J. – Putnam, B. (eds.): Economic Interdependence and Flexible Exchange Rates. Cambridge (MA), MIT Press, pp. 84–114.

Nieh, C.C., & Lee, C.F. (2001). Dynamic relationship between stock prices and exchange rates for G-7 countries. The Quarterly Review of Economics and Finance, 41(4), 477–490. doi: 10.1016/S1062-9769(01)00085-0

Ndako, U. B. (2013). Dynamics of stock prices and exchange rates relationship: evidence from five sub-Saharan African financial markets. Journal of African Business, 14(1), 47-57. doi: 10.1080/15228916.2013.765322

Phylaktis, K., & Ravazzolo, F. (2005). Stock prices and exchange rate Dynamics. Journal of International Money and Finance, 24, 1031–1053. doi: 10.1016/j.jimonfin.2005.08.001

Rahman, M.L., & Uddin, J. (2009). Dynamic relationship between stock prices and exchange rates: evidence from three south Asian countries. International Business Research, 2(2), 167. doi: 10.5539/ibr.v2n2p167

Smyth, R., & Nandha, M. (2003). Bivariate causality between exchange rates and stock prices in South Asia. Applied Economics Letters, 10(11), 699–704. doi: 10.1080/1350485032000133282

Soenen, L., & Hennigar, E. (1988). An analysis of exchange rates and stock prices: The US experience between 1980 and 1986. Akron Business and Economics Review, 19, 7–16.

Creative Commons License
This article licensed under Creative Commons Attribution-NonCommercial license (4.0)

Downloads

Download data is not yet available.