Effect of exchange rate volatility on profitability of South African mining firms - evidence from the JSE .

Abstract

The currencies of those countries that have adopted floating exchange rate regimes are susceptible to exchange rate volatilities. A plethora of research has been conducted in an attempt to establish the causes of such volatility and further to determine the effects on various micro and macroeconomic aspects of a country. This research paper investigated the relationship between exchange rate volatility and the mining industry in South Africa for the period between February 1981 and August 2016. A literature study was conducted which resulted in the specification of a model to describe the studied correlation. The mining index from the JSE was utilized as a measure of the returns generated by the mining industry in South Africa. The real exchange rate between the South African Rand and US Dollar was employed to model the exchange rate volatility. A generalised autoregressive conditional heteroscedastic (GARCH) model was employed to express the relationship between the mining index and exchange rate volatility. Furthermore, a Granger causality test was applied to ascertain the causal direction of the relationships found. It was shown that exchange rate volatility had a positive relationship with the mining index, although the relationship was confirmed to be weak. This finding is supported by previous studies. The causality tests also indicated that currency volatility causes changes in the stock price levels of listed mining companies in South Africa. The study recommended that investors considering portfolios in the South African mining industry focus their predicting efforts on other market influencing factors. Furthermore, mining managers can utilise the results of this study in selecting exchange rate risk management strategies. Finally, policy makers can leverage exchange rate policy as an instrument to attract foreign direct investment as the volatility pass through effect is minimal.