Abstract
After the 2008 global financial crisis there is an urgent need for a better
understanding of the level of financial market integration as well as the impact of
financial markets on the real economy. While investors consider South Africa to be
an emerging market, the level of sophistication and effectiveness of the South
African financial sector has been applauded by the World Economic Forum. This
thesis therefore empirically investigates South Africa’s financial market integration
with the rest of the world.
Three specific financial sectors are included in the study: the stock, bond and
currency market. The empirical analysis of each market is based on a sample
representative of the global market. Different sub-samples representative of
developed and emerging markets further refines the analysis. With the Arbitrage
Pricing Theory as a basis and factor analysis as the empirical technique used, an
appropriate number of common factors are extracted from each sample. The level of
financial integration is then measured as the variance share of the common
components.
The empirical results indicate that variation in the global stock market is much more
synchronised than in the other two markets. The least synchronised market is the
global market for government bonds. While developed and emerging markets in both
the stock and bond markets are driven by very similar economic factors, it is clear
that the emerging bond markets do not co-move with developed bond markets.
Focusing on South Africa, it is evident that the stock market is much more integrated
with the global markets than the bond and currency markets. This is not surprising if
one considers that the Johannesburg Stock Exchange is one of the oldest stock
markets in Africa, and in the world. Rolling regressions confirm that the level of
integration in all three markets varies over time and that the level of integration
shows an increasing trend over time. Finally, it is concluded that the South African
financial market is integrated with world markets...
D.Com. (Economics)