1. Sub title: JSE Performance andAuthor: LuwayneGrowth

2. Title of Research PaperThe Performance of the Jamaica StockExchange index (JSE) and its Impact onEconomic Growth2 Luwayne Thomas 11/12/2012 3. About Author Bsc. Business, Economics andSocial Statistics: 2006 -2009 (UWIMona) MSC. Economics: 2009 2011 (UWIMona) Currently: COO at Balcostics Limited Visit: www.balcostics.com for details3 Luwayne Thomas 11/12/2012 4. Examples of Public Companies4 Luwayne Thomas 11/12/2012 5. Examples of Private Companies5 Luwayne Thomas11/12/2012 6. Purpose of Study To determine, if there exist astatistical relationship between theperformance of the JSE index andeconomic growth (GDP). Also, to determine the directionaldynamics if/when a statisticalrelationship is confirmed between6Luwayne Thomas11/12/2012the two variables. 7. Review of Literature Greenwood and Smith (1997) -posited that large stock marketsgenerally reduce the cost ofaccumulating capital Levine (1991) argues that stockmarket liquidity is imperative to acountrys economic growth prospects7 Luwayne Thomas 11/12/2012 8. Review of Literature cont. Greenwood and Jovanovic (1990) informed capital injections canexponentially increase productivityand growth within a country.8Luwayne Thomas 11/12/2012 9. Review of Literature cont. Michelacci and Suarez (2004) posits that stock market encouragesbusiness creation, innovation and growthby allowing the recycling of informedcapital.9 Luwayne Thomas 11/12/2012 10. Review of Literature cont. Nowbutsing and Odit (2009) foundthat stock market development positivelyaffects economic growth in both the longand short run. Oskooe (2010) The researcher found that in the short run, stock market performance was a leading indicator of10 future economic growth in IranLuwayne Thomas 11/12/2012 11. Review of Literature cont. Adamopoulos (2010) - causalrelationship between stock marketdevelopment and economic growth inGermany a direction from stock marketdevelopment to economic growth11 Luwayne Thomas11/12/2012 12. Methodology The researcher utilized quarterly time series data ranging from 1998 to 2010 (52 data points) Data was retrieved from the Bank of Jamaica website: (JSE index performance, and the GDP data)12Luwayne Thomas 11/12/2012 13. Methodology cont. Time graphs/plots: LOG GDP11.8011.7611.7211.6811.6411.6011.5698 99 00 01 02 030405 06 07 08 09 10Year13 Luwayne Thomas11/12/2012 14. Methodology cont. LOG JSE 12.0 11.6 11.2 10.8 10.4 10.09.698 99 00 01 02 030405 06 07 08 09 10Year14 Luwayne Thomas11/12/2012 15. Methodology cont. Unit Root Tests The Augmented Dicky-Fuller (ADF) test was used to determine the stationarity or otherwise of the variables (GDP and JSE index) Table: Unit root test Variables ADF at levels ADF at first difference Log_GDP-1.137403 -7.752179*** Log_JSE-0.907591 -5.207917*** Note: *** denote significance at the 1% level15 Luwayne Thomas11/12/2012 16. Methodology cont. Granger causality tests used to investigate the existence of a causal relationship between the variables. The procedure states that if past values of a variable Y significantly contribute to forecasting the future value of another variable X, then Y is said to Granger CauseThomasLuwayneX.16 11/12/2012 17. Methodology cont. Co-integration test the variables are both integrated of order 1 (the first differences are stationary) As such we utilize the Engle and Granger co-integration procedure to see if there existed a long run relationship between the two variables.17 Luwayne Thomas11/12/2012 18. Methodology cont. Error Correction Models (ECM) Use to determine the short run correction process. Once the co-integration tests shows a long run relationship, then there must exist a short run correction process that returns the series to its18 equilibrium.Luwayne Thomas11/12/2012 19. Results and Discussion Long Run Dynamics: co-integration test The null hypothesis was rejected since the p-value issignificant at the 5% level. Therefore, we can conclude that the performance of theJSE index and the growth rate of GDP for Jamaica arerelated over the long run.Table : ADF test of residuals from the regression of log_jse on log_gdp[log_gdp = a + b(log_jse) + e] Exogenous: None Lag Length: 0 (Automatic based on SIC, MAXLAG=9)t-Statistic Prob.* Augmented Dickey-Fuller test statistic-3.565430 0.0406 Test critical values: 1% level-3.565430 5% level-2.91995210% level-2.597905 19*MacKinnon (1996) one-sided p-values. Luwayne Thomas 11/12/2012 20. Results and Discussion cont. We found that for every 10 per cent increase in the performance of the JSE index, the rate of growth of GDP for Jamaica is expected to increase by approximately 7 percent JSE heavily weighted with financial stocks [Log_gdp = a + b(log_jse) + e] Dependent Variable: LOG_GDPMethod: Least SquaresVariableCoefficient Std. Errort-Statistic Prob.C 10.893310.045736238.1803 0.0000 LOG_JSE0.0725490.00425517.04833 0.0000R-squared 0.864025F-statistic317.7139Durbin-Watson stat 0.610105 Prob(F-statistic) 0.0000002011/12/2012 Luwayne Thomas 21. Results and Discussion cont. Short Run Dynamics: Error Correction Model The speed of adjustment parameter (LRESID_OLS) of -0.2408 shows that any fluctuations from the long run path will adjust at a rate of approximately 24% per quarter until equilibrium is reached That is, it would take approximately four quarters or a year for any shocks to the growth path of GDP associated to changes in the JSE index to reflect in GDP outturn. Method: Least Squares Variable Coefficient Std. Error t-Statistic Prob.-0.240804 0.097788 -2.462517 0.0176 0.060926 0.140545 0.4334970.6667 0.000911 0.017786 0.0512340.9594 0.001889 0.0016991.111966 0.2719 R-squared0.12613621 Luwayne Thomas 11/12/2012 Adjusted R-squared 0.069145 22. Results and Discussion cont. Granger Causality This null is rejected at the 5% level of significanceand confirms the existence of a causalrelationship running from the JSE index to GDPgrowth rates. Pairwise Granger Causality Tests Table: Results from the Granger Causality Test Lags: 5 Null Hypothesis: Obs F-Statistic Prob. LOG_JSE does not Granger Cause3.55917 LOG_GDP47*0.0102 LOG_GDP does not Granger Cause LOG_JSE Note:* denotes significant at the 5% level0.99213 0.436222 11/12/2012Luwayne Thomas 23. Discussions Many economist have identified thewealth effect as a possibleexplanation for the positive relationshipbetween the performance of stockindexes and economic growth. Fluctuations in stock prices are directlyrelated to changes in wealth levels As households become poorer their income will be directed towards necessities (food and23 shelter) rather than investments recessionLuwayne Thomas 11/12/2012 2007 24. Discussions cont. The Government of Jamaica should integrate into its growth strategy, plans for the further development of the Jamaica stock exchange more manufacturing and services companies needed (too many banks) This is justified since we have found the performance of the index to be a leading24 Luwayne Thomas 11/12/2012 indicator of economic growth 25. Discussions cont. High interest rate policies generally do not provide the most suitable environments for stock markets to perform effectively Competition between private and public enterprises for capital is usually biased the state is deemed less risky for similar rates of return25Luwayne Thomas11/12/2012 26. Application of the research Better economic analysis and decision making as it relates to investment opportunities in the economy The government could target performance levels of the JSE index, being cognizant of its leading effects on the countrys economic growth26Luwayne Thomas11/12/2012 27. Conclusion There is a long run relationship between the performance of the JSE index and GDP growth rate. Past values of the JSE index were significant in predicting future growth rates in GDP. That is, the performance of the JSE27 index Granger cause GDP growth! Luwayne Thomas11/12/2012 28. The End!!! Questions??????28 Luwayne Thomas11/12/2012