Identification and Performance Evaluation of Rand

Fatti, Anton Libero Paul
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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.
Hedge stocks , Rand hedge stocks , Johannesburg Securities Exchange