Identification and Performance Evaluation of Rand
Date
2011-04-05
Authors
Fatti, Anton Libero Paul
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Abstract
The historical volatility of the rand exchange rate has encouraged investors on the JSE
Securities Exchange to invest in shares which are believed to have an inverse
relationship to exchange rate movements of the rand, thus providing a buffer against
rand weakness. As a result, the effective functioning of these shares in their role as
“rand hedges” is of considerable economic importance for the many investors who
rely on them to minimise exchange rate risk. However, the practice of identifying
rand hedge stocks is complicated by the existence of long-term trends in share price
and exchange rate time-series, which may falsely indicate hedging behaviour.
The objective of this research was to investigate whether removing the long-term
trends in share price and exchange rate data could lead to the reliable identification of
rand hedge stocks on the JSE. The underlying hypothesis was that by removing longterm
trends in share-price time-series, the occurrence of spurious correlations between
share price and exchange rate movements could be eliminated, thus facilitating the
identification of shares possessing fundamental relationships with short-term
movements in the rand exchange rate.
The results from the research indicate that the proposed methodology is effective in
identifying the subset of hedge stocks which have underlying short-term positive
(hedging) relationships with the exchange rate. However, there exist hedge stocks
which do not exhibit this short-term positive relationship, and these will not be
identified by the methodology.
Description
MBA - WBS
Keywords
Hedge stocks, Rand hedge stocks, Johannesburg Securities Exchange