Identification and Performance Evaluation of Rand

The historical volatility of the rand exchange rate has encouraged investors on the JSESecurities Exchange to invest in shares which are believed to have an inverserelationship to exchange rate movements of the rand, thus providing a buffer againstrand weakness. As a result, the effective functioning of these shares in their role as“rand hedges” is of considerable economic importance for the many investors whorely on them to minimise exchange rate risk. However, the practice of identifyingrand hedge stocks is complicated by the existence of long-term trends in share priceand exchange rate time-series, which may falsely indicate hedging behaviour.The objective of this research was to investigate whether removing the long-termtrends in share price and exchange rate data could lead to the reliable identification ofrand hedge stocks on the JSE. The underlying hypothesis was that by removing longtermtrends in share-price time-series, the occurrence of spurious correlations betweenshare price and exchange rate movements could be eliminated, thus facilitating theidentification of shares possessing fundamental relationships with short-termmovements in the rand exchange rate.The results from the research indicate that the proposed methodology is effective inidentifying the subset of hedge stocks which have underlying short-term positive(hedging) relationships with the exchange rate. However, there exist hedge stockswhich do not exhibit this short-term positive relationship, and these will not beidentified by the methodology.