The relationship between derivatives, portfolio flows and economic growth: Evidence from South Africa

Ndzululeka, Khanya

The relationship between derivatives, portfolio flows and economic growth: Evidence from South Africa

Master Thesis

2020

Abstract

This study examines the interactions between derivatives trading, portfolio flows and economic growth in South Africa over the period 2000: Q1 to 2018: Q4. As derivatives are widely accepted as effective risk management solutions in developed nations, and can facilitate capital flows to emerging markets, there is a need to investigate the empirical relationships between derivatives, portfolio inflows and economic growth. A vector error correction model was used in addition to conducting Granger causality, impulse response functions and variance decomposition tests to analyse the relationship between the factors of interest. The efficiency of the model was established using standard diagnostics, which confirmed the overall significance of the model. The VECM results find a positive short- and long-run relationship between portfolio flows, derivatives trading and economic growth in South Africa. The Granger causality tests, impulse response analysis and variance decompositions find a short-run relationship only between portfolio flows and derivatives trading. The implications are thus that derivatives trading can lead to an increase in portfolio flows.

Keywords

Development Finance

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