Characterising cycles exhibited by important financial sections in the South African economy

Abstract

Orientation: The 2007–2008 global financial crisis caused negative spillovers to the real economy of the United States as well as other economies across the world. Research purpose: The main aim of this article is to determine the cyclical characteristics of important South African financial sections. Motivation for the study: Financial cycles are complex, making them hard to measure and understand. This, in turn, makes financial cycles and the effect of fluctuations in financial cycles hard to predict and manage. Research design, approach and method: Principal component analyses were used to construct an index for these South African financial sections. The Christiano–Fitzgerald (CF) band-pass filter was used to extract cycles from these South African financial indexes. Finally, spectral density analysis was used to characterise the cyclical duration exhibited by each South African financial section. The time horizon of this study ranges from 01/01/1975 to 01/12/2017, a 42-year period. Main findings: The analysis showed that the South African credit cycle has the longest duration among all the South African financial sections and has a duration longer than that of the traditional business cycle. The cycles of other South African financial sections provided no clear evidence of durations longer than the traditional business cycle. Furthermore, South African interest rate conditions and South African economic confidence measures exhibit the largest amplitude. Practical/managerial implications: The findings of this study can be used to enhance the efficiency of policies to manage cyclical fluctuations of important South African financial cycles and help other economic participants to anticipate cyclical fluctuations and thereby manage the potential effects of such fluctuations. Contribution/value-add: The results in this study therefore offer value to both policymakers and other economic participants, such as asset managers, who need to make decisions related to cyclical fluctuations in South African financial conditions.

Keywords

• financial cycles
• spectral density analysis
• principal component analysis
• Christiano–Fitzgerald filter