3. Electronic Theses and Dissertations (ETDs) - All submissions
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Item Foreign exchange risk and the flow of international portfolio capital: evidence from Africa's capital markets(2012-03-14) Kodongo, Christopher OdongoThis dissertation addresses two major issues. First, it investigates whether currency risk commands a significant premium in representative equity markets in Africa. The International Arbitrage Pricing Theory and the Stochastic Discount Factor model respectively provide the analytical frameworks for the unconditional and the conditional asset pricing models used to investigate currency risk pricing. Empirical data analysis uses the Generalized Method of Moments estimation technique. Second, it examines the nexus between real foreign exchange rates and net international portfolio flows in representative capital markets in Africa. Time series and panel data techniques are employed to this end. The study covers seven major African countries: Botswana, Egypt, Ghana, Kenya, Morocco, Nigeria, and South Africa over the period January 1997 through December 2009. Foreign exchange risk is found to be non-priced unconditionally when returns are measured in the US dollar; weakly priced unconditionally when returns are measured in the euro; and priced with time-varying risk premia in the conditional sense. Africa’s equity markets are found to be partially integrated with the rest of the world. Monthly international portfolio flows to Africa are found to be low, non-persistent and relatively volatile. Using monthly data, Granger causality tests and innovation accounting from vector autoregressions (VARs), the study shows that the dynamic relationship between the real exchange rates and net portfolio flows is both country-dependent and time-varying. The findings are robust to alternative VAR specifications. However, annual data exhibit strong causality moving from real exchange rates to net portfolio flows, suggesting that fluctuations in real exchange rates inform the investment decisions of foreign investors in Africa’s capital markets. Among the key policy implications, it is recommended that, in addition to the US dollar and precious metals, Africa’s monetary authorities should regard the euro as an important reserve currency; that policies be put in place to expedite the development of private fixed income securities and derivatives markets; that sound monetary policies be instituted to ensure that interest rate changes are market-determined and inflationary pressures are well-managed; and that regional markets integration and financial sector development policies be pursued more meticulously by governments in Africa.Item Essays on speculative bubbles in financial markets(2012-01-20) Mungule, Oswald KombeThe 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.