Jse Presentation Final

8/3/2019 Jse Presentation Final

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Author: Luwayne

Sub title: JSE Performance and

Growth


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04/22/2012Luwayne Thomas2

The Performance of the Jamaica Stock

Exchange index (JSE) and its Impact on

Economic Growth

Title of Research Paper


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Examples of Public Companies



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Examples of Private Companies



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Purpose of Study


To determine, if there exist astatistical relationship between theperformance of the JSE index and

economic growth (GDP).

Also, to determine the directionaldynamics once a statisticalrelationship is confirmed between

the two variables.


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Review of Literature


A plethora of theoretical and empiricalwork has examined the relationshipbetween economic growth and

development of stock markets .Greenwood and Smith (1997) - posited

that large stock markets generally reduce

the cost of accumulating capitalLevine (1991) argues that stock market

liquidity is imperative to a countrys

economic growth prospects


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Review of Literature cont.


Holmstrom and Tirole (1998)

examined the incentive issues

surrounding the desires of investorsto acquire information.Informed investor represents a positive

externality to the wider economy sincethey (the investors) will require more fromfirms in terms of corporate governance

and by extent capital allocation


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Greenwood and Jovanovic(1990) informed capital injections can

exponentially increase productivityand growth within a country.

While also returning significant profits toinvestors who took on the risk associatedwith the initial venture


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Michelacci and Suarez (2004)posits that stock market encouragesbusiness creation, innovation and growth by

allowing the recycling of informed capital.

Levine and Zervos (1998)- found a

significant correlation between stock marketliquidity and current and future economicgrowth rates, capital accumulation and

productivity


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Nowbutsing and Odit (2009)foundthat stock market development positively

affects economic growth in both the long

and short run.

Oskooe (2010)found that in the shortrun, the researcher found that the stockmarket was a leading indicator of future

economic growth in Iran


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Adamopoulos (2010) - causalrelationship between stock marketdevelopment and economic growth in

Germany a direction from stock marketdevelopment to economic growth


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Grossman and J. Long (1996)-linked the decline of the British empire to ananemic rate of investment in domestic

industry which occurred in spite of veryhealthy rate of national savings.

pointing to a fear of equities by British

investors, which resulted in local industrialistshaving to pay higher premiums on equitycapital than industrialists in Germany and theUnited States the main competitors toBritain.


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Methodology


The researcher utilized quarterlytime series data ranging from 1998

to 2010 (52 data points)

Data was retrieved from the Bank of

Jamaica website (JSE index, andthe gross domestic product GDP)


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11.56

11.60

11.64

11.68

11.72

11.76

11.80

98 99 00 01 02 03 04 05 06 07 08 09 10

LOG GDP

Year

Methodology cont.


Time graphs of the GDP rate and JSE index arepresented


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Methodology cont.


9.6

10.0

10.4

10.8

11.2

11.6

12.0

98 99 00 01 02 03 04 05 06 07 08 09 10

LOG JSE

Year


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Methodology cont.


Unit Root Tests The Augmented Dicky-Fuller (ADF)

test was used to determine the stationarity or otherwiseof the variables (GDP and JSE index)

Table: Unit root test

Variables ADF at levels ADF at first difference

Log_GDP -1.137403 -7.752179***

Log_JSE -0.907591 -5.207917***

Note:*** denote significance at the 1% level


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Methodology cont.


Granger causality testsused toinvestigate the existence of a causalrelationship between the variables.

The procedure states that if past values ofa variable Y significantly contribute to

forecasting the future value of anothervariable X, then Y is said to Granger

Cause X.


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Methodology cont.


Co-integration testthe variablesare both integrated of order 1 (the firstdifferences are stationary)

As such we utilize the Engle andGranger co-integration procedure to

see if there existed a long runrelationship between the two variables.


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Methodology cont.


Error Correction Models (ECM)Use to determine the short runcorrection process.

Once the co-integration tests shows a

long run relationship, then there mustexist a short run correction processthat returns the series to its

equilibrium.


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Results and Discussion


Long Run Dynamics: co-integration test

The null hypothesis was rejected since the p-value issignificant at the 5% level.

Therefore, we can conclude that the performance of theJSE index and the growth rate of GDP for Jamaica are

related over the long run.Table : ADF test of residuals from the regression of log_jse on log_gdp

[log_gdp = a + b(log_jse) + e]Null Hypothesis: RESIDUALS () has a unit root

Exogenous: None

Lag Length: 0 (Automatic based on SIC, MAXLAG=9)t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.565430 0.0406

Test critical values: 1% level -3.565430

5% level -2.919952

10% level -2.597905

*MacKinnon (1996) one-sided p-values.


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Results and Discussion cont.

04/22/2012 Luwayne Thomas21

Found a long run relationship betweenGDP growth rate and the growth rate of the

JSE index

That is, for every 10 per cent increase in theperformance of the JSE index, the rate ofgrowth of GDP for Jamaica is expected toincrease by approximately 7 percent

[Log_gdp = a + b(log_jse) + e]Dependent Variable: LOG_GDP

Method: Least Squares

Variable Coefficient Std. Error t-Statistic Prob.

C 10.89331 0.045736 238.1803 0.0000

LOG_JSE 0.072549 0.004255 17.04833 0.0000

R-squared 0.864025

F-statistic 317.7139 Durbin-Watson stat 0.610105

Prob(F-statistic) 0.000000


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Short Run Dynamics: Error Correction Model

The speed of adjustment parameter (LRESID_OLS)of -0.2408 shows that any fluctuations from the longrun path will adjust at a rate of approximately 24% perquarter until equilibrium is reached

That is, it would take approximately four quarters or ayear for any shocks to the growth path of GDPassociated to changes in the JSE index to return toequilibrium (normal).Dependent Variable: D_LOG_GDP ()

Method: Least Squares

Variable Coefficient Std. Error t-Statistic Prob.

LRESID_OLS (1) -0.240804 0.097788 -2.462517 0.0176

DLLOG_GDP (1) 0.060926 0.140545 0.433497 0.6667

DLLOG_JSE (1) 0.000911 0.017786 0.051234 0.9594

C (1) 0.001889 0.001699 1.111966 0.2719

R-squared 0.126136

Adjusted R-squared 0.069145


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04/22/2012Luwayne Thomas

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Granger Causality

The empirical results from Table highlight thenull hypothesis that the performance of theJSE index does not Granger cause GDP

growth rateThis null is rejected at the 5% level of significance

and confirms the existence of a causal

relationship running from the JSE index to GDPgrowth rates.Table: Results from the Granger Causality Test

Pairwise Granger Causality Tests

Lags: 5

Null Hypothesis: Obs

F-

Statistic Prob.

LOG_JSE does not Granger Cause

LOG_GDP 47 3.55917* 0.0102

LOG_GDP does not Granger Cause LOG_JSE 0.99213 0.4362Note:* denotes significant at the 5% level


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Discussions


Many economist have identified thewealth effect as a possibleexplanation for the positive relationshipbetween the performance of stock

indexes and economic growth.Fluctuations in stock prices are directly

related to changes in wealth levels

(prices change with demand).As households become poorer their

income will be directed towards

necessities (food and shelter) rather


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Discussions cont.


The Government of Jamaica should

integrate into its growth strategy, plans forfurther development of the Jamaica stockexchange

This is justified since we have found theperformance of the index to be a leadingindicator of economic growth

Providing further incentives for investorsto invest on the JSECurrently dividend payments on investments by

foreign investors are taxed; this is a disincentive


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Discussions cont.


High interest rate policies generally do notprovide the suitable environments for stock

markets to perform adequately

Competition between private and publicenterprises for capital is usually biased the state is deemed less risky for similar rates of

returns afforded from higher interest rates being

offered by the government.

As a result, private liquidity goes into safegovernment paper rather than securities of

companies looking to raise capital


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Application of the research


Better economic analysis and decisionmaking as it relates to investmentopportunities in the economy

Findings provide a fresh outlook onJamaicas economic problems and the

methods currently being used to

address them.The government could target

performance levels of the JSE index,

bein co nizant of its leadin effects on


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Conclusion


That there is a long run relationshipbetween growth performance of the JSEindex and GDP growth rate.

That past values of the JSE index weresignificant in predicting future growthrates in GDP.That is, the performance of the JSE index

Granger cause GDP growth


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The End!!!

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