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Institutionalisation of Derivatives Trading and Economic Growth: Evidence from South Africa

2 March 2015
Publication Type: Working Paper
JEL Code: G1, G2, O1

The purpose of this paper is to foresee the likely developmental impact of the proposed institutionalisation of derivatives trading in sub-Saharan Africa(n) (SSA) countries. The case of South Africa is emphasised to illustrate how domestic derivatives trading could influence economic growth and economic growth volatility; measuring growth in real GDP. From an empirical standpoint, the influence of local derivatives activity on economic growth could not be proven, even though a long-run Granger causality is reported from economic growth to the expansion of local derivatives. These results at least sustain the realistic view that developing derivatives markets is a rather long-run process, and that efficient trading could not be achieved over the short-run. GARCH (1, 1) representation of a significant negative effect of derivatives trading on growth volatility establishes the stabilising effect of derivatives markets on the economy, but this does not constitute sufficient evidence to prove that derivatives trading can contribute to economic growth. Recommendation is that further research should look into the impact of derivatives trading on the liquidity of capital markets so as to assess the extent to which derivatives markets are able induce liquidity in their underlying capital markets, and thus provide suitable conditions for their own expansion and survival.

Series title: Working paper 505
1 March 2015
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