Structural changes in exchange rate-stock returns dynamics in South Africa: Examining the role of crisis and new trading platform

Phiri, Andrew (2018): Structural changes in exchange rate-stock returns dynamics in South Africa: Examining the role of crisis and new trading platform.

Abstract

The 2007 sub-prime crisis and the adoption of Millennium trading platform represent two of the most important recent structural developments for the Johannesburg Stock Exchange (JSE). Under an environment of flexible and volatile exchange rates, this study seeks to examine the effects of these two structural events on the exchange rate-equity returns nexus for 4 JSE indices using the nonlinear autoregressive distributive lag (N-ARDL) cointegration. We use monthly data collected from 2000:M01 to 2017:M12, and conduct our empirical analysis over sub-periods corresponding to breaks caused by the crisis and the use of a new trading platform. We find prior the crisis exchange rates appreciations generally cause stock returns whereas depreciations are unlikely to cause stock returns to decrease. However, during crisis period this relationship entire disappears whilst resurfacing subsequent to the adoption of a new trading platform although the dynamics of the time series differs between sectors. Our overall empirical results caution regulatory authorities to closely monitor stock market developments as the new trading platform offers market participants opportunities of using the exchange rate to beat the market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock returns; Exchange rates; High frequency trading; Millennium trading platform; N-ARDL model; Flexible Fourier form unit root test; South Africa; Emerging economies.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G10 - General

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