Is there a Causality Between Economic Growth Variables and Derivatives Usage?

Abstract

Objectives (The study empirically tested the relationship between derivative markets growth and economic growth, for the period 1996 to 2018. The direction of causality was tested utilising South African data set). Approach (Vector autoregressive model estimation technique and granger causality test was employed to assess the relationship and direction of causality between the variables in STATA 15).Results (The results firstly, exhibit that derivatives and economic growth had a negative correlation with Vector autoregressive models both in the short and long term. Secondly, derivatives and economic growth had a unidirectional relationship running from derivatives to economic growth with granger causality test. The explanatory variables, bank lending and firm value had a bidirectional relationship with economic growth. Also, derivatives had a bidirectional causality to the bank lending and firm value in South Africa). Implications (Based on the results generated, it is concluded that regulators and policy makers should encourage the use of derivatives so that banks could efficiently provide funding and enhance liquidity on the capital market which will increase economic activities). Value (The model captured the liquidity channel and productivity of the industries through bank lending and firm value as a result of derivatives usage).