The effects of exchange rate volatility on portfolio equity investments into South Africa

Zvidza, Miranda Sibusisiwe (2016-12)

Thesis (MDF)--Stellenbosch University, 2016.


ENGLISH SUMMARY : The study analyses the effects of exchange rates volatility on portfolio equity investment in South Africa using quarterly time-series data for the period 1985 Q3 to 2015 Q4. Exchange rate volatility was modelled using EGARCH (1, 1) model. The Unit root test confirmed that all the variables used in the model were stationary either in their levels or at first difference. The multiple regression model results revealed that exchange rate volatility characterised by the conditional variance of the EGARCH (1, 1) model and macroeconomic pull and push factors have significant effects on portfolio equity investment in South Africa. The study revealed that the GARCH term (Beta1 = 0.803962) implies that shocks to the conditional variance are highly persistent and take long to die out. The research findings also confirmed the existence of negative and statistically significant leverage effects (γ= -0.2846) at 5% level of significance. The Treasury bill rate of South Africa (Beta2= 2.700063) was found to have a positive impact, while the Treasury bill rate of the USA (Beta3 = -0.135991) exhibited a negative impact on portfolio equity investment over the period analysed. Industrial production of the USA (Beta4=12.53743) showed a positive statistically significant impact on portfolio equity investment at 5% level of significance. The variables were also found to be cointegrated and the impulse responses as well as the variance decompositions of the estimated VECM were strongly consistent with the existence of a positive and statistically significant long run relationship between portfolio equity investment and exchange rate volatility at 5% level of significance. The block exogeneity test results also validated a uni-directional causality run from portfolio equity investment to exchange rate volatility over the sample period. The research concluded that the push and pull factor dichotomy as well as the exchange rate volatility characterized by the conditional variance of the EGARCH (1,1) model have a significant explanatory power on the patterns of portfolio equity investments flows to South Africa.

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