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

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  • Hamisu Sadi ALI
  • Mansur IDRIS
  • Yusuf Ibrahim KOFARMATA

    (Universiti Putra Malaysia, Malaysia.)

Abstract

We applied asymmetric cointegration approach to investigate 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.

Suggested Citation

  • Hamisu Sadi ALI & Mansur IDRIS & Yusuf Ibrahim KOFARMATA, 2015. "Stock Prices and Exchange Rates Dynamics in South Africa: An application of Asymmetric Co-integration Approach," Journal of Economics Library, KSP Journals, vol. 2(3), pages 165-172, September.
    • Handle: RePEc:ksp:journ5:v:2:y:2015:i:3:p:165-172
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    References listed on IDEAS

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    1. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-176, April.
    2. Paul Alagidede, 2009. "Relationship between stock returns and inflation," Applied Economics Letters, Taylor & Francis Journals, vol. 16(14), pages 1403-1408.
    3. Paul Alagidede & Theodore Panagiotidis & Xu Zhang, 2011. "Causal relationship between stock prices and exchange rates," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 20(1), pages 67-86.
    4. Raymond Donnelly & Edward Sheehy, 1996. "The Share Price Reaction of U.K. Exporters to Exchange Rate Movements: An Empirical Study," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 27(1), pages 157-165, March.
    5. Ajayi, Richard A. & Friedman, Joseph & Mehdian, Seyed M., 1998. "On the relationship between stock returns and exchange rates: Tests of granger causality," Global Finance Journal, Elsevier, vol. 9(2), pages 241-251.
    6. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    7. Zhao, Hua, 2010. "Dynamic relationship between exchange rate and stock price: Evidence from China," Research in International Business and Finance, Elsevier, vol. 24(2), pages 103-112, June.
    8. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-971, December.
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    Cited by:

    1. Andrew Phiri, 2020. "Structural changes in exchange rate-stock returns dynamics in South Africa: examining the role of crisis and new trading platform," Economic Change and Restructuring, Springer, vol. 53(1), pages 171-193, February.

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    More about this item

    Keywords

    Stock prices; Exchange rates; Cointegration; Asymmetric; TAR; MTAR.;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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