Effects of exchange rate movements on stock market prices in South Africa

Abstract

The exchange rate and stock market prices nexus can help investors to diversify their portfolio and choose a country for investment to increase the returns in their portfolios. Exchange rate as the rate of one country's currency in terms of another, play an important role in a country's level of trade. The paper investigated the relationship between stock market prices and the exchange rate in South Africa using monthly data for the period 2006 to 2016. The analysis began by conducting the unit root tests using both the Augmented Dickey Fuller and Phillips- Perron approaches to address stationarity in this time series model. The model applied the Johansen cointegration, Autoregressive Conditional Heteroskedasticity (ARCH) and the generalised ARCH (GARCH) models due to high volatility of the stock market prices. The ARCH test indicated presence of heteroscedasticity and that gave way to run the GARCH model. The GARCH model results confirmed that when the foreign exchange rate appreciates, the stock market will thus be negatively affected. The results from the Johansen cointegration test have proven that a long relationship between stock market prices and the exchange rate exist. A large portion of Johannesburg Stock Exchange investors are foreign and are influenced by variations in the exchange rate on share-price valuation. Hence, it is recommended that the South African Reserve Bank needs to stabilise and protect South Africa's currency.