Assessing the Baltic Dry Index as a predictor for South African sector indices

M.Com. (Finance)Abstract: This minor dissertation presents research on the Baltic Dry Index and seeks to identify the relationships between the Baltic Dry Index and the South African sector indices. The objective of the research is to identify whether or not the Baltic Dry Index can act as a leading indicator for South African sector indices. The Baltic Dry Index is a financial index that represents the freight cost of shipping dry bulk (i.e. raw materials). Dry bulk cargo refers to raw materials such as iron ore, coal, grain, and other materials. The literature review reveals leading relationships between the Baltic Dry Index and several global economic and financial indicators, such as economic activity. However, there is limited research on the relationship between the Baltic Dry Index and South African financial and economic indicators. The research seeks to identify and explain any lead lag relationships that exist between the Baltic Dry Index and the Johannesburg Stock Exchange indices. Particular emphasis is given to the Baltic Dry Index’s influence on the South African sector indices. The Vector Autoregression model was used. On the basis of the time series data and frequency of the data used, the results indicate that significant lead relationships exist between the Baltic Dry Index and the Johannesburg Stock Exchange indices for both mining, and construction and materials. In particular, one lag of the Baltic Dry Index leads the Johannesburg Stock Exchange mining and construction indices, while statistical significance was insufficient to prove that the Baltic Dry Index leads the other selected indices. Surprisingly, the relationship tends to be negative according to the impulse response functions where a rise in the Baltic Dry Index causes negative changes in the Johannesburg Stock Exchange mining and construction indices two weeks after such rise. This finding is supported by Lin and Sim (2013, 2014)