3. Electronic Theses and Dissertations (ETDs) - All submissions
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Item An analysis of the random walk hypothesis: Evidence from the Lusaka stock exchange(2014-07-29) Kabaye, TaniyaThe paper evaluates whether the Lusaka Stock Exchange (LuSE) is weak form efficient, and whether stock price movements conform to the random walk hypothesis of non-predictability in future price movements based on past price information. The methods employed are the parametric and non-parametric individual as well as multiple variance ratio tests. In addition, the study incorporates the Runs Test. The study further examines seasonality in Zambian stock returns of the day of the week effect as well as monthly related effects. The period of analysis is from 3rd January, 2006 to 17th February, 2014. The study incorporates daily data as well as monthly data of the LuSE All share Index in order to investigate the random walk hypothesis as well as seasonality effects of the Zambian market. The period of analysis is broken down into two sub periods after accounting for multiple structural breaks in the data. The results of the study are mixed, the results of the Runs test finds the Zambian stock market price series to be mutually independent and conform to a random sequence, and are as such unpredictable. While the variance ratio tests reject the random walk hypothesis for the Zambian market, and as such, support the view of the use of technical trading strategies in order to outperform buy-and-hold strategies. The study finds no evidence of any seasonality in the data, either for daily data as well as monthly data. As such there is evidence that investors may acquire returns greater than those of the market, however, transaction costs and commissions would have to be minimal in order to exploit any patterns in the stock price series of the Lusaka stock exchange.Item Algorithmic trading, market efficiency and the momentum effect(2014-02-24) Gamzo, Rafael AlonThe evidence put forward by Zhang (2010) indicates that algorithmic trading can potentially generate the momentum effect evident in empirical market research. In addition, upon analysis of the literature, it is apparent that algorithmic traders possess a comparative informational advantage relative to regular traders. Finally, the theoretical model proposed by Wang (1993), indicates that the informational differences between traders fundamentally influences the nature of asset prices, even generating serial return correlations. Thus, applied to the study, the theory holds that algorithmic trading would have a significant effect on security return dynamics, possibly even engendering the momentum effect. This paper tests such implications by proposing a theory to explain the momentum effect based on the hypothesis that algorithmic traders possess Innovative Information about a firm’s future performance. From this perspective, Innovative Information can be defined as the information derived from the ability to accumulate, differentiate, estimate, analyze and utilize colossal quantities of data by means of adept techniques, sophisticated platforms, capabilities and processing power. Accordingly, an algorithmic trader’s access to various complex computational techniques, infrastructure and processing power, together with the constraints to human information processing, allow them to make judgments that are superior to the judgments of other traders. This particular aspect of algorithmic trading remains, to the best of my knowledge, unexplored as an avenue or mechanism, through which algorithmic trading could possibly affect the momentum effect and thus market efficiency. Interestingly, by incorporating this information variable into a simplified representative agent model, we are able to produce return patterns consistent with the momentum effect in its entirety. The general thrust of our results, therefore, is that algorithmic trading can hypothetically generate the return anomaly known as the momentum effect. Our results give credence to the assumption that algorithmic trading is having a detrimental effect on stock market efficiency.Item Determinants of household savings and the effect of household savings on the stock market in South Africa and China: a comparative survey(2014-01-16) Mutyaba, FranklinSavings are vital in the functioning of any economy as the level of savings in an economy determines the resources available for investment. If firms plan to invest more than households save in an open economy, resources will have to be borrowed from overseas. Savings flow into the financial system and help provide funds for investment spending by firms. This study draws a comparison between the determinants of household discretionary savings in South Africa and China. This study as well investigates the effect of household savings on the stock market in South Africa and China. Empirical analysis was performed inorder to determine the relationship between household savings and various variables, and the effect of household savings on the stock market. Money and quasi money (M2) is the only significant variable and having a negative relationship with household savings in South Africa yet in China, inertia is present the lagged household saving rate is significant. In-order to figure out the impact of household savings on the stock market, we regressed household savings against stock market capitalization. The regression results revealed significance of the explanatory variable household saving in South Africa and insignificance in China. Household savings have an effect on the level of stock market capitalization in South Africa but not in China.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.