Effects of Exchange Rate Volatility on the Stock Market: A Case Study of South Africa

Abstract

This study assessed the effects of currency volatility on the Johannesburg Stock Exchange. An evaluation of literature on exchange rate volatility and stock markets was conducted resulting into specification of an empirical model. The Generalised Autoregressive Conditional Heteroskedascity (1.1) (GARCH) model was used in establishing the relationship between exchange rate volatility and stock market performance. The study employed monthly South African data for the period 2000 -2010. The data frequency selected ensured an adequate number of observations. A very weak relationship between currency volatility and the stock market was confirmed. The research finding is supported by previous studies. Prime overdraft rate and total mining production were found to have a negative impact on Market capitalisation. Surprisingly, US interest rates were found to have a positive impact on Market capitalisation. The study recommended that, since the South African stock market is not really exposed to the negative effects of currency volatility, government can use exchange rate as a policy tool to attract foreign portfolio investment. The weak relationship between currency volatility and the stock market suggests that the JSE can be marketed as a safe market for foreign investors. However, investors, bankers and portfolio managers still need to be vigilant in regard to the spillovers from the foreign exchange rate into the stock market. Although there is a weak relationship between rand volatility and the stock market in South Africa, this does not necessarily mean that investors and portfolio managers need not monitor the developments between these two variables.

Effect of Exchange Rate Returns on Equity Prices: Evidence from South Africa and Nigeria

“…Hence, more efficient hedging instruments needs to be put in place by firms on the stock market to ensure the elimination of negative effects of rand volatility. This finding is consistent with Mlambo et al (2013) who examined the effect of currency volatility on the Johannesburg Stock Exchange and found a weak relationship between currency volatility and the stock market. Since the South African stock market did not have much exposure to the negative effects of currency volatility, they recommended that the South African government can use exchange rate as a policy tool to attract foreign portfolio investment.…”

“…Papaioannou, 2006;Agrawal et al, 2010;Mlambo et al, 2013;Caporale et al, 2015;Abraham, 2016;Sichoongwe, 2016;Ozhan et al, 2016;Sichoongwe, 2016;Gatawa & Mahmud, 2017;and Gatawa & Mahmud, 2017). However, little information is available from these studies on the effect of exchange rate returns and its volatility on the stock market.…”

“…While several studies (e.g. Agrawal, Srivastav, & Srivastava, 2010;Mlambo, Maredza, & Sibanda, 2013;Abraham, 2016;Sichoongwe, 2016;and Gatawa & Mahmud, 2017) have examined the effect of exchange rate fluctuation on the performance of stock markets in developing and emerging economies, investigating the effect of exchange rate returns on the performance of emerging stock markets in Africa, could provide further insight on the need to commit to prudent exchange rate management regimes.…”

“…The implication is that exchange rate fluctuations does not have a direct effect on stock market returns, rather it is stock market returns that affects exchange rate. Mlambo et al (2013) examined the effect of currency volatility on the Johannesburg Stock Exchange using GARCH (1,1) model for South Africa based on monthly data from 2000-2010. Although they found a very weak relationship between currency volatility and the stock market, it was interesting to also see that US interest rates had a positive impact on the performance of the Johannesburg stock exchange.…”

The Effect of Macroeconomic Uncertainty on Firm Profitability: A Case of BIST Non-Metallic Mineral Products Sector

“…However, the relevant literature has generally focused on the relationship between several uncertainty factors and index returns not directly firm profitability (e.g. see Adjasi et al, 2008;Ozbay, 2009;Sariannidis, 2010;Savas and Can, 2011;Mlambo, 2013;Flota, 2014;Li et al, 2016). Only a few studies have researched the effect of macroeconomic uncertainty on firm profitability in both Turkey and all over the world (Demir, 2009;Mutluay and Turaboglu, 2013;Musa, 2014;Kemuma, 2015;Alibabaee and Khanmohammadi, 2016).…”