3. Electronic Theses and Dissertations (ETDs) - All submissions
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Item A study of exchange rate volatility, stock and bond returns in developing countries(2018) Ama-Njoku, ChiomaThere has been reports of past movements in stock-bond and stock to exchange rate volatility transmissions. However, studies on volatility transmissions between exchange rate and bonds seem to be non-existent, hence the need to determine the relationship between all these three variables. This study analyzes the link between exchange rate volatility, stock and bond returns in selected countries including Nigeria, Ghana, Kenya, South Africa, and India, using monthly time series data for a period of 5-years (2008-2012). The ARCH (Autoregressive conditional heteroscedasticity) and the more advanced GARCH (Generalized autoregressive heteroscedasticity) models are employed to generate volatilities for exchange rate, stock and bond returns. This is done to take a deeper look at how exchange rates reacted in each country since the year 2007 of the global financial crisis. The test for stationarity, and the order of integration of the data were conducted to get rid of any spurious regression results, using the ADF (Augmented Dickey-fuller method) method. The results showed a negative relationship between exchange rate and stock returns, but exchange rate volatility was insignificant for the stock market in Ghana, Nigeria and India. The relationship between the stock market and exchange rate volatility in Kenya and South Africa was positive. Bond returns were negatively correlated to exchange rate volatility in the Indian, Nigerian, and Kenyan markets, whereas, a positively relationship was found in South African bond market. The study concluded that although exchange rates can explain the cause of movement in stock prices, there are some other variables that cause a movement in stock returns and bond returns other than exchange rates such as inflation and money supply.Item Commodity prices and exchange rates in Southern African countries(2019) Theka, EdwardThis study empirically assesses the relationship between exchange rates movements with non-fuel commodity prices indices of five Southern African countries, namely; Botswana, Malawi, Mozambique, South Africa, and Zambia. Monthly International Monetary Fund (IMF) non-fuel commodity price indices (NFCI) and monthly exchange rates (expressed USD per unit of the local currencies) that span January 1996 to September 2018 were used for this study. The econometric techniques employed were EG two-stage and Johansen Trace cointegration tests, VAR(1) models, and Granger causality tests. The cointegration tests reveal no long-run relationship between commodity price index and exchange rates for all of the selected countries, which implies that in the long term there is equilibrium link between these two variables of interest for neither Botswana, Malawi, Mozambique, South Africa, nor Zambia. The study fails to reject that there is no Granger causality between the commodity price index and exchange rates in both directions for Botswana, Malawi, and Mozambique. At the 10% significance level commodity price index Granger cause exchange rates and exchange rates Granger cause commodity price index for South Africa; Zambia has only a uni-directional Granger causality from exchange rates to commodity price index. Thus, the interdependence between these two variables is not complete but partial. It is recommended that, for further studies, an endeavor be made to find the possible exogenous variables that serve as the determinants of commodity prices and exchange rates.Item An assessment of the long-term commodity price assumptions on the Mineral Reserve estimates of South African gold and platinum mining companies from 200 to 2016(2018) Maseko, VulaniIn the 19th and 20th centuries mining underwent an evolution from the exploitation of small mining properties by individual claim holders to consolidation and the formation of multinational mining companies. With the rise of multinational mining companies came the advent of international finance in the mining industry. As companies developed and operated larger mining projects across several geographies, their capital requirements increased. As the number of investors in mining projects increased, through the raising of finance on international capital markets, so did the importance of mineral asset reporting. While governments and other organisations reported on the mineral inventories of countries, international mining companies had to report on only the economic portions of their mineral assets. The early days of international mineral asset reporting resulted in several reporting scandals where investors were misled by unscrupulous companies and individuals who reported false mineral deposit quantities and qualities in an attempt to manipulate investor sentiment for personal profit. As a result of these reporting scandals, the international mineral reporting codes were developed to increase the quality and transparency of mineral asset reporting and to protect investors. In the case of South Africa, the South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC) Code, was first published in March 2000 and adopted by the Johannesburg Stock Exchange (JSE) later that year. The SAMREC Code, like the other international mineral reporting codes, aimed to ensure quality and transparent mineral asset reporting. Mineral Resources and Mineral Reserves are collectively a backbone asset for any company in the minerals industry This research study assessed the reporting of Mineral Reserves in South Africa in the period from the introduction of the SAMREC Code, in 2000, to 2016, with specific focus on reporting by South Africa’s gold and platinum mining companies. Mineral Reserve reporting was identified as a key focus, as Mineral Reserves are the economically mineable portions of Mineral Resources, and therefore give a better indication of the prospects of mining companies in the short to medium term. The literature review conducted as a part of this research study indicated that long-term commodity prices are the most important modifying factors used in Mineral Reserve estimation, hence there was a specific focus on the long-term commodity prices used in the Mineral Reserve estimates of South Africa’s gold and platinum mining companies. However, the relationships between the Mineral Reserve estimates and the other modifying factors were also assessed. The research demonstrated a general improvement in the quality of Mineral Reserve reporting by South Africa’s gold and platinum mining companies since the introduction of the SAMREC Code in 2000. However, the quality of Mineral Reserve reporting by the platinum mining companies was found be considerably less detailed to that of the gold mining companies. The long-term gold prices of the gold mining companies were found to be relatively conservative, often falling below prevailing spot prices, while the long-term prices of the platinum mining companies were often found to be more optimistic, with long-term platinum group metals (PGM) prices that were generally above prevailing spot prices. This research study also assessed the relationship between the Mineral Reserve estimates of South African gold and platinum mining companies and their reported modifying factors, with a specific focus on long-term commodity prices. The coefficient of determination (R2) was used to assess the relationship between Mineral Reserve estimates and their associated modifying factors. The statistical analysis conducted demonstrated that the Mineral Reserves of South African gold and platinum mining companies between 2000 and 2016 were often most sensitive to changes in long-term commodity prices, relative to the other modifying factors. The long-term commodity price assumptions of mining companies affect the value at which assets are recognised on their balance sheets. Sustained and fundamental differences between the long-term commodity price assumptions of mining companies and prevailing spot commodity prices may result in mining companies having to record impairments against their assets. In the period between 2000 and 2016, South African gold mining companies recognised a total of ZAR46bn (in nominal terms) in non-financial asset impairments, while platinum mining companies impaired their non-financial assets by a total of ZAR54bn. An assessment of the non-financial asset impairments of South Africa’s platinum and gold mining companies revealed that the least number of impairments were recorded when long-term commodity prices were within 5% of spot prices, suggesting that this should be the range within which long-term prices should be determined to limit future impairments.Item Insuring resource revenues against commodity price volatility(2018) Thomas, AurelienSolutions to the so-called resource curse have been various and diverse. However, results have been at best inconclusive, if not counter-productive. In this research report, drawing from a thorough literature review on the resource curse, evidences are presented that a previously over-looked factor, volatility in commodity prices, is the cause of the resource curse. Building up on this conclusion, it is demonstrated that a simple insurance mechanism that would reduce volatility in commodity prices would help resource-rich countries to articulate sustainable macroeconomic and fiscal policies that would lead to sustainable growth. Back-testing this model, it is demonstrated that such an insurance mechanism would have withstood the financial crisis of 2008. Collectively, the results of this research report support the hypothesis that volatility carries an overwhelming share of responsibility in the process through which resource-rich nations lag behind resource-poor nations in terms of development, being economic or human. This research report concludes that this simplified model should serve as a foundation for future research and that this model should be expanded and tested on a greater scale to confirm its benefits. This research report provides an innovative approach to solving the resource curse which should certainly be used and expanded in future research.Item Essays on commodity prices and financial market variables evidence from Sub Saharan Africa(2017) Ndlovu, XolaniVolatility in international commodity prices is almost accepted as a stylised fact in modern financial markets. The drivers of commodity prices have evolved in addition to traditional global demand and supply factors. The literature suggests a number of other drivers, among them, activities of speculators – the so called “financialisation” of commodities postulate, the role of China and Fed policy. The question of whether exogenous shocks to commodity prices are transmitted through financial markets in Africa is investigated. In addition, the hypothesis of “wealth-transfer” from exporters to importers of commodities when prices fall is tested. Further, commodity prices are tested for their in sample and out of sample predictive ability. Finally recommendations are made for policy makers and financial market players in frontier markets in Africa. The three essays are organised in Chapters 3 to 5 of the study. In Chapter 3, an ARDL bounds testing approach is adopted and we find that a South Africa-specific commodity index significantly predicts (in-sample) the exchange rate in the short-run. While the long-run relationship is weak and the associated error correction process is slow existence of cointegration of commodity prices and the exchange rate suggests that commodities explain a significant part of terms of trade fluctuations for South Africa. With respect to the structural exchange rate models of the South African Rand, using the Dynamic Ordinary Least squares (DOLS) estimator, we find that commodity prices are significant and consistent explanatory variables of the changes in the nominal exchange rate. The commodity price variable improves the in-sample fit of the structural exchange rate models presented in this chapter and this evidence is robust to the other major Rand cross rates. Further, inclusion of the commodity price variable improves the out-of-sample short horizon forecasting ability of canonical exchange rate models. 2 In Chapter 4 we employ dynamic econometric modelling techniques to confirm the existence of a strong financial channel through which copper price shocks are transmitted to the Zambian economy. In the short run, changes in the copper price lead changes in all financial market variables. Financial market variables and the price of copper share a long-run equilibrium relationship. Importantly, if this system is out of its long-run equilibrium, short run corrections back to equilibrium are made by adjustments to the short term interest rate. Fittingly, the copper price-interest rate relationship appears strong in the long run. This result suggests that the policy makers “over-rely” on monetary policy to accommodate shocks from the international price of copper. The exchange rate and equity prices appear weakly exogenous to the system in-sample and out of sample. In Chapter 5, we confirm existence of a structural break in the price of oil in July 2008. We also show that the financial market time series for Kenya and Nigeria also exhibit a significant structural break around this period. We therefore partitioned our sample to investigate the effect of structural shocks to the financial markets of the two markets. On the whole, we find that the nexus between financial markets and oil prices is much stronger and statistically significant for an oil exporter (Nigeria) and weaker and statistically insignificant for a net oil importer (Kenya) after the 2008 financial crisis. Prior to the 2008 oil price shock, the results are roughly the opposite of the post oil shock period for both countries. Our results highlight that it is important to account for major structural shifts in modelling the impact of oil prices in developing countries (Le and Chang, 2011). The “wealth transfer” argument from net importer to net-exporters exists between Kenya and Nigeria in the short run although it is not robust to sample specification. Finally, we highlight the inherent flaws and limitations of ex-post stabilisation funds in Africa and make a case for market based oil-price hedging instruments. We argue for the adoption of market based hedging instruments given 3 the promising growth in financial markets of developing African countries in spite of several thorny implementation difficulties.Item Short-run exchange rate dynamics in South Africa: a microstructure approach(2017) Phiri, EgnatiousThis dissertation investigates the short-run variation of the South African Rand versus the US Dollar exchange rate. A market microstructure approach to exchange rate determination is adopted and the central hypothesis is that customer order flow is an important determinant of short-run variation in the exchange rate. Two key objectives are examined. Firstly, the paper looks at the in-sample explanatory power of the order flow as a key determinant of exchange rate variation. Secondly, the practical significance of order flow is evaluated by looking at its out-of-sample forecasting accuracy. The findings from this study suggest that order flow can explain some of the variation in exchange rate; however, a large portion of the exchange rate variation remains unexplained. Further, the out-of-sample performance of the order flow model is found to be inferior to that of the GARCH model for periods up to 6 months and inferior to the naïve Random Walk model at 12 months horizons. The evaluation of a Vector Autoregression model suggests that there are feedback effects from exchange rate returns to order flows. This means that Ordinary Least Squared estimates could be biased and the results thus inaccurate and misleadingItem Determination of the real exchange rate in commodity exporting countries: do commodity prices matter?(2017) Sitole, Risenga WisemanThis study examines the relationship between major commodity exports and the real exchange rate of commodity exporting countries. We make use of monthly commodity price time series data to determine the causality relationship between exchange rates and the top three commodity exports from 5 commodity exporting countries (Brazil, Chile, Mexico, Norway and South Africa). Due to the phenomenon called “Dutch Disease” commodity exporting countries’ economies are found not to experience large economic success during periods of booming export commodity prices. Using data from the IMF IFS database, only one country out of the five included in this study shows evidence of conitegration relationship between commodity prices and exchange rates, although there is some evidence of commodity prices explaining the movement of exchange rates in all five countries. We find that commodity prices do play a role in the exchange rates movement in commodity exporting countries.Item Transaction costs in foreign exchange markets as an impediment to intra-SADC trading(2011-11-10) Manyadu, SithembeleThe main goal of this research is to investigate whether foreign exchange transacting costs are an impediment to intra-regional trading within the Southern African Development Community SADC region. The research question posed has been whether foreign exchange trading costs affect the amount of intra-regional trading within the SADC region. Once the impediments relating to regional trading have been broken down and the cost effect on Small, Medium and Micro Enterprises SMMEs is established, then possible solutions are proposed. The research discovers that the cost of foreign exchange has an impact on intra-regional trading, but it is not the main hindrance to intra-regional trading in the SADC. It also discovers that the settlement risk of a foreign exchange transaction in the region has not yet been addressed to the same or similar extent as in the developed world. The extent of trading partners’ currency volatility is a function of the amount of trade between those trading partners. The SADC countries’ currency pairs volatility can be reduced by increased trade. Having said that, businesses need to plan and high levels of volatility tend to be disruptive. This is now the area where it is suggested that central banks within the region should actively participate in foreign exchange markets. Central banks should be the facilitator or price-maker of last resort in cases of lack of liquidity of local or foreign currencies. The research suggests that they should play a role in ensuring or reducing the amount of rapid currency spikes that lead to disorderly markets. The research also discovers that SMMEs are a core part of the economies of developing countries, and therefore a serious look at this sector of the economy is suggested. Mobile communication networks, like cell phones, are the current accessible and preferred communications tool among the geographical regions and areas that are hard to reach. Cell phones have also doubled as a form of payment among rural, African countries. The research suggests leeching on the current cell phone iii banking platforms to enable better foreign exchange reach to SMMEs and the general public. It suggests interlinking relationships between banks and cell phone networks, where the cell phone companies facilitate the accessibility and the banks’ liquidity. The report takes cognisance of the fact that, inasmuch as the countries in SADC are geographically close to each other, their political, economic and social dynamics can be wildly different. This would therefore mean that the proposed solutions are not necessarily a one-size-fits-all, but could be adjusted and tweaked to suit individual country dynamics.