Derivative Markets and Economic Growth: A South African Perspective

Abstract

It is well established that financial development and innovation promote economic growth through improving the allocation of capital, enhancing risk management, contributing to price discovery, and increasing market efficiencies. While a vast empirical literature is devoted to the nexus between financial development and economic growth, however, substantially less research has been done on the relationship between derivatives and growth, especially in the emerging-market context. Derivatives can be viewed as a specific category of financial innovation, which may advance economic growth through its specialised functions of risk management and price discovery. This paper contributes to bridging this gap in the literature by exploring the impact of exchange-traded futures derivatives on South African economic growth, output, and economic growth volatility. It employs ARDL bounds tests, Granger causality tests and GARCH volatility modeling to analyse the effects of exchange-traded futures derivatives on various measures of South African economic activity. The main result is that exchange-traded futures derivatives contribute positively to South African economic growth and economic activity. This may suggest that opportunities might exist in other emerging economies, with financial structures comparable to that of South Africa, to encourage the development of organised and well-regulated derivatives markets to unlock economic growth in these economies.

Keywords

• derivatives
• futures
• financial development
• economic growth
• ARDL bounds test
• Granger causality