The response of the Johannesburg stock exchange to changes in exchange rate regimes

Abstract

This paper used Granger Causality test and descriptive statistics analysis to examine the response of the South African stock market to different exchange rate regimes from 1978 to 2008. The analysis of the history of the exchange rate regimes in South Africa showed that the flexibility was introduced in 1979 but the exchange rate shocks of great magnitude appeared during the period of the free-floating exchange rate system (1995-2008). Results reported in this paper revealed that the response of Johannesburg Stock Exchange to changes in the exchange rate was not consistent throughout different exchange rate regimes. A significant correlation between the variables during the sub-periods characterised by capital controls was observed. Granger causality test revealed that the direction of causality changed with exchange rate regimes. This paper concluded that changes in exchange rate regimes have a significant impact on the relationship between the stock market index and the exchange rate.