51. WAVELET-BASED ANALYSIS OF THE CO-MOVEMENT BETWEEN EXCHANGE RATE A ND STOCK RETURNS IN SACU COUNTRIES
- Author
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Mkhombo, Thando and Phiri, Andrew
- Subjects
Monetary policy ,Stock markets ,Stocks ,Stock market ,Business ,Economics ,Business, international ,Regional focus/area studies ,African Growth and Opportunity Act of 2000 ,Southern African Customs Union - Abstract
The Southern African Customs Union is the oldest customs union in the world and the member states form a currency union with the South African Rand being the regional currency anchor. Therefore, currency movements amongst SACU member are dependent on the developments on the Rand which, in turn, can affect stock market development in the region. We examine the time-frequency relationship between exchange rates and stock market returns in SACU countries using continuous wavelet transforms. Our empirical analysis is two-staged. Firstly, we employ wavelet power spectrum to examine the time-frequency properties of the individual series. Secondly, we use wavelet coherence analysis and phase dynamics to examine the synchronization between the variables in a time-frequency space. Our findings show stronger (weaker) exchange rate-stock returns relations are found during periods of higher (lower) inflation whereas we observe a stronger (weaker) relationship during periods of lower interest rate environment. Moreover, we find more significant long-run relationships for countries with more independent monetary policy (South Africa and Botswana) whereas these relations are more prominent over the short-run for countries with pegged exchange rates (Eswatini and Namibia). We also observe that periods of oil and currency shocks impact the exchange rate-stock returns relationship in SACU countries with pegged exchange rates (Eswatini and Namibia). Our findings bear important implications for different stakeholders. For instance, this study has implications for exchange rate policy as it addresses the issue of whether the exchange rate can be used to improve market performance or exchange rate developments spillover into the stock market. Furthermore, corporate managers and stock market participants would be interested in our findings as it identifies periods of market inefficiency when exchange rates can be used to beat the stock market. JEL Classifications: C1, C2, C5 and G1 Keywords: Continuous wavelet transforms, Wavelet coherence, exchange rates, stock market, SACU, INTRODUCTION Following widespread changes in the international exchange rate system and the increased globalization of capital markets experienced over the last quarter of the century, equity and currency markets have [...]
- Published
- 2023