The properties of cycles in South African financial variables and their relation to the business cycle

The goal of this thesis is twofold: it aims, firstly, at a description of cycles in SouthAfrican financial variables and, secondly, at the evaluation of the relationshipbetween cycles in financial variables and the South African business cycle. The studyis based on the original business cycle framework of Arthur Burns and WesleyMitchell, but incorporates recent contributions by Australian economists Don Hardingand Adrian Pagan, as well as the work of the Economic Cycle Research Institute inNew York.Part I of the thesis is concerned with the characteristics of cycles in financial variableswithin the South African context. The first chapter presents a taxonomy of theconcepts of classical, deviation and growth rate cycles in order to establish a simplereference framework for cycle concepts. At this point the concept of a ‘turning pointcycle’ is introduced, with particular focus on the non-parametric method of turningpoint identification, following Harding and Pagan’s recent translation of the originalwork of Burns and Mitchell into a modern version with a sound statistical basis. Withthe turning points identified the dissertation proceeds to an exposition of descriptivemeasures of expansion and contraction phases. The second chapter entails anempirical report on descriptive results for amplitude and duration characteristics ofcycle phases in the different financial variables, with separate reports for classicalcycles and growth rate cycles. Chapter two concludes with a series of tables in whichthe behaviour of cycle phases are compared for different financial variables.Part II considers financial variables as potential leading indicators of the businesscycle in South Africa. Chapter 3 introduces the concept ‘leading indicator’ to this endand distinguishes the original concept from modern, econometric versions. Thechapter then introduces a framework for evaluating potential leading indicators, whichemphasises two requirements: firstly, broad co-movement between cycles in theproposed leading indicator and the business cycle and, secondly, stability in thenumber of months between turning points in cycles of the proposed indicator andbusiness cycle turning points. The capacity of potential indicators to meet thesecriteria is measured via the concordance statistic and the ‘lead profile’ respectively.Chapter four provides the statistical basis for the concordance statistic, after which the empirical results (presented separately for classical and growth rate cycles) arepresented. The fifth chapter presents the statistical test for the stability of the intervalby which cyclical turning points in the potential indicator lead turning points in thebusiness cycle. Empirical results are presented in both tabular form (the ‘leadprofile’) and graphical form (the ‘lead profile chart’). As far as can be determined,this analysis represents the first application of the ‘lead profile’ evaluation to financialvariables. Chapter six concludes by presenting a summary of the results and a briefcomparison with findings from an econometric study of leading indicators for SouthAfrica.