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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
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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
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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.
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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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Review of Literature cont.
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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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Review of Literature cont.
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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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Review of Literature cont.
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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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Review of Literature cont.
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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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Review of Literature cont.
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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
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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.
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Time graphs of the GDP rate and JSE index arepresented
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Methodology cont.
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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.
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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.
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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.
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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.
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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
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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.
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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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Results and Discussion cont.
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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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Results and Discussion cont.
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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
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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.
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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.
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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
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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
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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!!!
Questions??????