Interrelations among stock prices of South Africa and the United States and the rand/dollar exchange rate

Abstract

This paper seeks to examine the dynamic short-term causal relations and the long-term equilibrium relations between the two major financial assets, stock prices of the US and South Africa and the rand/US$ exchange rate. The study uses a mixed bag of time series approaches such as cointegration, Granger causality, impulse response functions and forecasting error variance decompositions. The study identifies a long-run relationship among the rand/US$ exchange rate and the stock prices of South Africa and the United States. It was also observes that there is a causal relationship from the stocks in the United States to the rand/US$ exchange rate. In the short run however, the interactions among the variables are quite modest. The result of the study has implications for investors, policy makers and researchers.