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The Causal Relationship between Exchange Rates and Stock Price Levels in South Africa

Author

Listed:
  • Lelani Coetzee

    (Department of Economics, University of Pretoria, South Africa)

  • Goodness C. Aye

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

Abstract

This paper studies the causal relationship between the exchange rate and stock prices and the effect of the financial crisis on this relationship. The results show that exchange rate and stock prices were unrelated prior to the crisis, yet the interdependence between these markets has increased since the crisis as there is now unidirectional Granger causality from stock prices to the exchange rate. It further confirms that the five aforementioned variables exhibit two long-run cointegrating relationships. Stock prices and the exchange rate are negatively correlated - an increase in stock prices thus leads to an appreciation of the exchange rate.

Suggested Citation

  • Lelani Coetzee & Goodness C. Aye, 2017. "The Causal Relationship between Exchange Rates and Stock Price Levels in South Africa," Working Papers 201722, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201722
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    More about this item

    Keywords

    Exchange rate; stock price; long run; causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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