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    The determinants of return on equity in emerging markets financial industry: evidence from Brics
    (2018) Ndlovu, Chiedza
    Return on equity is believed to be one of the most important financial metrics to measure how well shareholders’ investments into a profit-making organisation are profitably converted into positive and sustainable returns. Investigation into the determinants of return on equity in financial firms is important due to the role of financial system towards economic development. Notwithstanding increased attention received in literature on the determinants of profitability, there still exist important research gaps on how industry structure, macroeconomic fundamentals, financial sector development, capital mobility, efficiency and funding drives return on equity. Chapter 2 examined how return on equity reacts to variations in macroeconomic fundamentals given varying industry structures. The key observation from this chapter is that the influence of macroeconomic fundamentals on return on equity deteriorates as one moves from competitive industries to moderate and highly concentrated industries. In addition, return on equity is highly volatile in highly concentrated industries and less volatile in competitive markets. Chapter 3 investigated the impact of financial sector development on the variations of return on equity using both Granger causality tests and the Generalised Method of Moments. Key findings from this chapter is that return on equity in BRICS financial firms is principally caused by financial sector development through financial integration, however, the impact of financial integration on return on equity is generally negative. Chapter 4 analysed the combined effect of monetary policy regimes and various levels of capital mobility on return on equity. The main findings from this chapter is that return on equity of financial firms is negatively and significantly affected by growth in money supply where the monetary policy regime is expansionary and capital mobility is high or where monetary policy regime is expansionary and capital mobility is moderate or where both monetary policy regime and capital mobility are moderate. Finally, chapter 5 analysed efficiency theories and funding structures as determinants of return on equity. Pioneering evidence from this study reveals that relative measures of funding are highly sensitive to investment companies only while the results from absolute levels of funding are mostly sensitive to banking only.
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    Monetary policy, asset prices and consumption : evidence from South Africa using the (FAVAR) approach
    (2018) Chimombe, Trevor Tinotenda
    This study is an addition to the useful application of the FAVAR method in estimating the effects of monetary policy shocks on the economy. It also fills a gap to the literature on the wealth channel effect of monetary policy through shocks on stock prices. We recognize further that very little work has been done in analyzing this wealth channel on African countries and therefore aim to provide explanations using the South African economy. We find results consistent with economic theory and literature using a few macroeconomic data variables on the South African economy. Firstly, consumption is a slow-moving variable and it takes at least one quarter before households completely adjust their consumption habits in response to the interest rate shock. We also find that interest rate changes vary the opportunity cost of holding money causing households to shift their money balances in response to the policy shock. This means consumption and short-term monetary policy shocks have a negative correlation. We also find asset markets to be weak form efficient, that is, stock prices react efficiently to policy announcements but with a lag. The speed of adjustment is delayed. This explains the results obtained which show a smooth concave response which means asset prices react positively to interest rate shocks in the short run, and negatively in the long-run.
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    Forecasting emerging markets interest rates using optimal time-varying financial conditions index
    (2018) Dlamini, Lefu Jonase
    This paper aims to optimise the financial conditions index (FCI) indicator that best describes the monetary policy interest rate setting behaviour of twelve emerging market central banks. This is achieved by analysing and looking at the background of modelling interest rates and forecasting interest rate setting behaviour from various regions globally. Following the credit crisis of 2008, the conventional wisdom and foundations that prevailed before were profoundly shaken. Particularly the conduct and behaviour of central banks in response to financial conditions assumed centre stage. Consequently, there has been a consensus among economists and policymakers on the importance of financial conditions, and the influence thereof, on the interest rate setting. However, in order for central banks to achieve their financial stability objectives, they need to construct an optimal indicator that best describes financial conditions. To construct such an optimal indicator, this paper firstly investigates whether the central banks of emerging markets follow the Taylor rule in setting their interest rates. Secondly, it investigates whether the FCI with optimal time-varying weights better describes interest rate movements in emerging markets, when incorporated in the Taylor rule. Lastly, it evaluates interest rate predictability by comparing various models that include non-optimized FCIs. The paper finds that the majority of emerging countries follow the Taylor rule. It also finds that most emerging markets take into account the information contained in FCIs and the majority of these countries, optimize the variables that enter the FCIs. When evaluating the forecasting accuracy of these models, the paper finds that the optimized model ranks superior in most countries in terms of forecasting accuracy. The optimization and allocation of the variables that enter the optimized FCI happen in a similar manner that was proposed by Markowitz in portfolio allocation theory.
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    Competing theories of the wage-price spiral and their forecast ability
    (2017) Mokoka, Tshepo
    This thesis contains three main chapters. The rst chapter employs wageprice spirals to generate ination forecasts for Australia, Canada, France, South Korea, South Africa, United Kingdom and the United States. We use three competing specications of the wage-price spirals, and test which specication provides the best forecasts of price ination. For each specication we provide one quarter, four quarter and eight quarter ahead dynamic forecasts of price ination. The rst two wage-price spirals in the rst chapter are from the Keynesian tradition from te standpoint of expectations formation. The chapter also considers the New Keynesian wage-price spiral. We use the Root Means Square Error and the Clark and West statistic to compare the performance of ination forecasts from the three competing wage-price spirals that we consider in the rst chapter of the thesis. We nd that the New Keynesian wage and price specication su⁄ers from the wrong sign problem, and its forecasts of price ination generally outperform those from the old Keynesian wage price spiral for the eight quarter ahead time horizon. The usefulness of this nding to the conduct of monetary policy is limited due to the wrong sign problem of the forcing variable in the New Keynesian wageprice spiral. We also nd that the Flaschel type specication of price and wage ination produce four and eight quarter head ination forecasts that are better than those from the Fair type specication. We further nd that the Fair type specication price and wage equation produce the best forecasts of ination for the one quarter ahead time horizon. In the second chapter, we estimate natural variables and test their ability to explain the ination process for the eight countries that we consider. We use the traditional Keynesian wage-price spiral and the triangle system approaches to estimate the NAIRU and potential output. In the case of the traditional Keynesian wage-price spiral, the price Phillips curve, which can be specied as a triangle Phillips curve, features backward looking ination expectations and nominal wage ination, the output gap and supply shocks. The nominal wage Phillips curve features ination expectations and price ination and the unemployment gap. The presence of price ination in the nominal wage Phillips curve and the presence of nominal wage ination in the price Phillips curve leads to the interaction between the two Phillips curves. The separate demand pressure terms allows for their identication since, as someauthorsintheliteraturearguethatthegoodsandlabourmarketsdonot move in line with each other. To compute the NAIRU and potential output using the Keynesian approach, we rstly exploit the information contained in vector of unobservable by estimating the wage-price spiral in di⁄erence form using the Seemingly Unrelated Regression method. We use this regression method in order to control for any correlation that may exist between errors in the price and wage Phillips curves. This allows us to solve for the vector of potential output and the NAIRU. We then the moving average technique in order to avoid problems associated with the HP lter for smoothing. Due to data availability, use the MA (20) approximation of the low pass lter after padding the endpoints with forecasts from an AR(4) process. We follow a similar procedure in the estimation of the estimation of the NAIRU and potential output for the triangle system approach. To test which method produces the best natural variables, we t the gaps that are computed from the NAIRU and potential output in a simple single equation price Phillips curve. To test which specication produces the best natural varibles we use a simple single equation triangle price Phillips curve. We nd that the output gaps computed from the two competing approaches are signicantly correlated, the same applies to the unemployment gaps computed from the two approaches. We nd that the quality of unemployment rate gaps computed from the Keynesian and triangle system approach to produce similar quality of results when tted to a single equation triangle price Phillips curve. The Keynesian approach slightly outperforms the triangle systems approach in the when considering the output gap as a proxy for the demand pressure. These results indicate that the wage-price spiral still remains an important tool in the determination of the dynamics ination. In the third chapter, we analyze the relationship between monetary policy and natural variables for Australia, Canada, France, South Korea, South Africa, United Kingdom and the United States. We do this by specifying a relationship between natural rates and the real interest rate. The theoretical relationship between the two variables is positive in the case of the NAIRU and negative through Okuns law in the case of potential output. We regress the natural variable against a constant and the MA(8) of the real interest rate. We nd that the parameter of the real interest rate generally has a correct sign when considering the Keynesian approach computed NAIRUs, with only four being signicant. In the case of the triangle system approach NAIRU, we nd that the real interest rate parameter has a correct sign and signicant four countries. We nd that NAIRUs computed using di⁄erent methodologies can produce a di⁄erent reference point for policy makers. We then introduce hysteresis in the relationship between monetary policy and the NAIRU. We then nd that the interest rate parameter generally has a incorrect sign across the three approaches. The HP ltering approach which we include in our study for comparison purposes produces incorrect correlation for all the countries, while the Keynesian approach negative correlation for seven countries, and the triangle system approach in six countries. In the case of the relationship between monetary policy and potential output, we nd that the real interest rate parameter has an incorrect sign. When introducing hysteresis in the relationship between monetary policy and potential we nd that, unlike in the case of the NAIRU this plays signicant role in the relationship.
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    Monetary policy and the stock market structure: some international empirical evidence
    (2016) Alovokpinhou, Sedjro Aaron
    This paper builds upon Blanchard's (1981) model of asset prices, and provides an empirical evidence for good news cases (GNC) and/or bad news cases (BNC) as de ned in Blanchard's paper. We update Blanchard's model by introducing Taylor's rule of monetary policy and explicitly incorporate income distribution in a small, open economy. The ndings indicate that, the labour share is a strong and signi cant variable that should be considered in asset pricing models. The real exchange rate plays a signi cant role in the determination of asset prices in most of the selected countries, but the signi cance is stronger in the emerging markets economies. As the main objective of the paper, the study has found four of the selected countries to be bad news cases and eight of them are good news cases.
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    Monetary policy transmission and house prices, a VAR approach: a case study of South Africa (1994 to 2011)
    (2013-08-21) Mutsvunguma, Priscilla Tatenda
    We analyse the role of financial and macro-economic variables in the conduct of monetary policy, particularly the role played by monetary policy in the house price boom of the early 2000s. The analysis is performed in the setup of a New Keynesian open economy. We estimate a five variable Recursive Vector Autoregressive model consisting of the short term interest rate, house prices, inflation, output and the exchange rate. Quarterly data from 1994 to 2011 was inputted in Eviews (6) to run the model. We find a significant causal relationship between the short term interest rate and house prices; the impulse response results show an instant response of house prices to a shock in monetary policy. We conclude that the house price boom of the early 2000s was partially attributed to an overreaction to a shock in monetary policy. We also find evidence of exchange rate pass- through to the consumer price index as in (Mishkin, 2008).We conclude that perhaps monetary policy should take cognisance of asset price fluctuations and exchange rate volatility in determining the policy instrument
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    Essays on speculative bubbles in financial markets
    (2012-01-20) Mungule, Oswald Kombe
    The first essay formulates a dynamic rational contagion model in order to analyse the evolution of speculative bubbles. The model consists of two laws of motion: the speculative bubble and the probability of the bubble. The rst essay shows that the model has two stable equilibria and one unstable equilibrium. The dynamics of both the nonlinear speculative bubbles and the probability interact to form two stable equilibria and one unstable equilibrium which lead to ballooning and busting of the speculative bubbles. These features of speculative bubbles are driven by the speculators’s herd behaviour, the bubbles size, the speed of change, the strength of infection, and the effects of both the bubbles and the short-term interest rate on the transition probability. The second essay extracts speculative bubbles from two nancial markets: the foreign exchange and the stock markets for South Africa between 1995Q2 and 2008Q4. The second essay uses the no-arbitrage models for the exchange rate and the stock price. By invoking the rational bubbles theory and using the residuals, we compute the asset price bubbles using the expectational restriction for rational bubbles theory. Three robustness checks on the computed bubbles con rm that speculative bubbles are present in the stock price and the exchange rate. By using iii Abstract iv graphs of speculative bubbles, we show that the speculative bubbles are consistent with the existence of bubble episodes as documented in the literature. The third essay formulates a macro-model of a small-open economy in order to investigate the relative performance of optimal monetary policy rules that respond to speculative bubbles and those that do not. The model consists of two nonlinear speculative bubbles: the stock price and the exchange rate bubbles. These speculative bubbles interact with the IS curve, the Phillips curve and the asset prices. The ndings show that policy rules that respond to speculative bubbles dominate rules that do not.
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    Convergence, asymmetry and monetary policy in a common monetary area
    (2011-11-21) Dlamini, Dumsile Faith
    This thesis examined the extent to which there is convergence in inflation rates, interest rates and incomes in the Common Monetary Area (CMA). It also investigated if countries in the area exhibit asymmetric adjustments to aggregate shocks. Based on optimum currency area theory, lack of convergence and the presence of asymmetric adjustments to shocks is likely to pose serious challenges that need to be addressed as the CMA moves towards a fully-fledged monetary union. I formulated and estimated a macroeconomic model to capture the transmission of shocks in the CMA. The model consists of four equations namely; Phillips curve, IS curve, exchange rate and monetary policy rule. The model links the CMA countries via the aggregate demand, inflation and interest rate equations. I simulated the model to assess the economic performance of the smaller countries when subjected to either a single monetary policy rule or country specific monetary policy rules. Such an analysis is used to gauge if a move towards a fully-fledged monetary union will result in higher benefits for the smaller countries. Furthermore, I estimated a structural VAR model based on the theoretical model. The identification restrictions in the VAR are also derived from the model. The analysis confirms monetary convergence, which is supported by the strong evidence of co-movement in interest rates and inflation rates in the CMA. Monetary convergence is an indicator of strong financial sector integration in the area. There is also evidence that inflation in the smaller countries is driven by that of South Africa. This result is mainly attributable to the strong trade links in the area as well as the existing parity between currencies in the area. The results also show that countries in the area are likely to face asymmetric shocks based on their composition of exports as well as the low correlation of growth rates. However, this asymmetry does not mean that countries cannot move towards iii creation of a fully-fledged monetary union, but rather that the existing asymmetries should be considered seriously by ensuring that other adjustment mechanisms are put in place. Extending the analysis to the SADC region shows that this region exhibits weak monetary convergence even though the poor countries show some form of real convergence with South Africa. Simulations from the VAR model show a price puzzle for Swaziland and South Africa but it is not prolonged. Based on the analysis the study concludes that a monetary union is possible in the CMA and is likely to be less costly. However, the evident asymmetries call for gradual step by step phasing in of the monetary union.
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    Price setting conduct in South Africa 2002-2007 : implications of microdata for monetary policy
    (2011-02-25) Creamer, Kenneth
    The objective of this research is to test the hypothesis that pricing conduct in South Africa, revealed by studies of pricing microdata, can be shown to have an impact on the modeling and conduct of monetary policy. In order to discern stylised facts about pricing conduct in South Africa, use is made of two unique microdata sets, which are the unit level basis of South Africa’s measured CPI and PPI over the period from December 2001 to December 2007. In particular, based on techniques which have been used in comparable studies in other countries, facts have been brought to light concerning inter alia the frequency of price changes, the magnitude of price changes, the duration of prices, heterogeneity in pricing, as well as evidence of seasonality, time-dependence and state-dependence in pricing conduct. In order to understand the implications of such pricing conduct, a basic closed economy theoretical model and thereafter an open economy New Keynesian DSGE model are used to compare the impact of various pricing assumptions. In general, but with some qualification regarding difficulties that arise in comparing pricing microdata with pricing conduct estimated in macro models, it is found that prices are more flexible than those estimated in the open economy DSGE model, implying sharper but less persistent interest rate responses to various shocks. Furthermore, the form of the New Keynesian Phillips curve used in the open economy DSGE model is found to be inconsistent with certain facts revealed through the price microdata.