Showing papers in "South African Journal of Economics in 2011"

Macroeconomic uncertainty and conditional stock market volatility in south africa

Abstract: This paper analyses how systematic risk emanating from the macroeconomy is transmitted into stock market volatility using augmented autoregressive Generalised Autoregressive Conditional Heteroscedastic (AR-GARCH) and vector autoregression (VAR) models. Also examined is whether the relationship between the two is bidirectional. By imposing dummies for the 1997-1998 Asian and the 2007-2009 sub-prime financial crises, the study further analyses whether financial crises affect the relationship between macroeconomic uncertainty and stock market volatility. The findings show that macroeconomic uncertainty significantly influences stock market volatility. Although volatilities in inflation, the gold price and the oil price seem to play a role, it is found that volatility in short-term interest rates and exchange rates are the most important, suggesting that South African domestic financial markets are increasingly becoming interdependent. Finally, the results show that financial crises increase volatility in the stock market and in most macroeconomic variables, and, by so doing, strengthen the effects of changes in macroeconomic variables on the stock market.

Dynamic effects of monetary policy shocks in Malawi

Abstract: The African Economic Research Consortium (AERC), the Bill & Melinda Gates Foundation and the Economic Research Southern Africa (ERSA).

Determinants of inflation in ghana: an empirical investigation

Abstract: This paper provides an empirical analysis of the factors accounting for inflation dynamics in Ghana using the bounds test and other econometric approaches. We find that real output, nominal exchange rate, broad money supply, nominal interest rate and fiscal deficit play a dominant role in the inflationary process in Ghana. To the extent that output growth by far has the strongest impact on inflation, targeting supply-side constraints will help moderate price inflation. The paper concludes that inflation in Ghana is explained by a combination of structural and monetary factors consistent with prior studies.

Forecasting performance of an estimated dsge model for the south african economy

Abstract: We construct a small open-economy New Keynesian dynamic stochastic general equilibrium (DSGE) model for South Africa with nominal rigidities, incomplete international risk sharing and partial exchange rate pass-through. The parameters of the model are estimated using Bayesian methods, and its out-of-sample forecasting performance is compared with Bayesian vector autoregression (VAR), classical VAR and random-walk models. Our results indicate that the DSGE model generates forecasts that are competitive with those from other models, and it contributes statistically significant information to combined forecast measures.

Youth unemployment, firm size and reservation wages in south africa

Abstract: Youth unemployment in South Africa is high. We investigate whether one of the reasons may be that the wages young people want or need are above those that they could reasonably expect to earn given their characteristics. Unlike previous work on the relationship between reservation wages and unemployment we differentiate between wages in different sizes of firms. Larger firms pay more and thus, even if reservation wages are similar to average predicted wages they may be above wages that young people could expect to earn in smaller firms. We find that this is the case.

Assessing monetary policy in south africa in a data‐rich environment

Abstract: This paper examines the efficacy of monetary policy in the South African economy using a data-rich framework. We use the Factor-Augmented Vector Autoregressive (FAVAR) methodology, which contains 110 monthly variables for the period 1985:02-2007:11. The results, based on impulse-response functions, provide no evidence of the price puzzle observed in traditional Structural Vector Autoregressive analysis and confirm that monetary policy in South Africa is effective in stabilising prices. Unlike the traditional vector autoregressive approach, the FAVAR methodology allows further analysis of a large number of variables. Variables from real and financial variables react negatively to a contractionary monetary policy shock. Finally, we find evidence of the importance of a confidence channel transmission following a monetary policy shock.

Food inflation in South Africa: some implications for economic policy.

Abstract: This paper analyses the trends in food price movements in South Africa between 1980 and 2008. There are three main results emanating from the analysis in this paper. Firstly, food price movements have played a large role in generating inflationary episodes in South Africa. Secondly, while external influences do matter, South African food price movements are mainly due to domestic influences. This implies that national policy has an important role to play in taming domestic food price inflation. Thirdly, given the strong second round impacts, food price movements warrant special attention in monetary policymaking. Core measures of inflation that exclude food price movements may not accurately reflect the underlying inflationary pressures in the economy and could compromise the attainment of the goal of price stability.

Small trade flows and preference utilisation: the case of the european union

Abstract: A significant number of preference eligible goods are imported into the European Union (EU) from developing countries at relatively low values. In 2008, more than 90% of the number of preferential import flows (at eight-digit level) represented together about 5% of the value of EU preferential imports from developing countries. While the overall utilisation of EU trade preferences is high, preference utilisation rates of these low-value imports are markedly lower. This fact is unobserved in the aggregate figures, and thus rarely noticed. This paper examines the extent and the importance of this phenomenon. It attempts to identify exporting countries and products that are particularly affected, and relate these findings to the preferential margin offered on the EU market as well as to the requirements of rules of origin.

Factors explaining the academic success of second-year economics students: an exploratory analysis

Abstract: Factors influencing the academic success of first-year economics students have been intensely researched. Lecture and tutorial attendance, age, gender, as well as matriculation results have been identified as significant in explaining academic performance. The academic success of senior students, however, has received less attention in South Africa. This paper presents the findings of an investigation into the academic performance of second-year economics students at Stellenbosch University. Using a Heckman two-step model, the study analyses whether the factors explaining first-year academic success are applicable in the second year or if other factors are relevant. The results suggest that most matriculation subjects become statistically insignificant for second-year students, whereas lecture and tutorial attendance remain important contributors to academic success. Furthermore, academic performance in the first year is an important determinant of success in the second year.

Finance and growth: new evidence on the role of insurance

Abstract: This paper provides new evidence that sheds light on the the impact of insurance sector development on output growth, capital accumulation, and productivity improvement, using data from 51 countries (developed and developing) during 1981-2005. The dynamic panel data analysis results demonstrate that insurance sector development affects growth predominantly through productivity improvement in developed countries, while in developing countries it promotes capital accumulation.

Is there an asymmetric behaviour in african inflation? a non-linear approach

Abstract: In this paper we test the inflation persistence hypothesis as well as model the long-run behaviour of inflation rates in a pool of African countries using a non-linear framework. In order to do so, we rely on unit root tests applied to non-linear models and fractional integration. The results show that the hypothesis of inflation persistence does not hold empirically for most of the countries. In addition, the estimated models (logistic smooth transition autoregressions) are stable in the sense that the variable tends to remain in the regime (low inflation or high inflation) once reached, and changes between regimes are only achieved after a shock. The results also indicate that the effects of the shocks on inflation tend to die out; exogenous factors, i.e. supply shocks and inertia may be causing this outcome, as they play a substantial role in the determination of the inflation rates for our selected African countries.

Foreign direct investment in zimbabwe: the role of institutional and macroeconomic factors

Abstract: The purpose of our research is to examine the impact of property rights on foreign direct investment (FDI) in Zimbabwe for the period 1964-2005. While the macroeconomic determinants of FDI have been analysed to a considerable extent in past empirical work, the role of institutional factors such as the protection of property rights and the efficiency of the legal system has been underexplored. Using a multivariate cointegration framework, we use a newly constructed de jure property rights index for Zimbabwe to determine the impact of property rights on FDI. The empirical evidence shows that property rights are consistently an important explanatory variable of FDI in Zimbabwe, even after controlling for periods when there are no significant new foreign capital inflows. Other significant explanatory variables of FDI in Zimbabwe are the real gross domestic product (GDP), capital intensity, the external debt to GDP ratio, political instability as well as the educational levels.

Mutual fund performance evaluation – application of system bcc model

Abstract: For the first time, this research adopts the system BCC model in data envelopment analysis in order to evaluate mutual fund performance and compares the results between the BCC model and the system BCC model. This study is based on the sample of stock funds and balanced funds in Taiwan, with the empirical results summarised as follows. (i) Under the system BCC model, the average score of balanced funds is greater than the average score of stock funds. (ii) There is a significant difference in efficiency scores between the BCC model and the system BCC model, and it is proper to adopt the system BCC model. (iii) The number of major reference sets that have been referenced under the BCC model is larger than under the system BCC model. (iv) If we neglect the distinctions between stock funds and balanced funds, there will be errors on performance assessment. Ultimately, the results reveal that there is a significant difference between the two models. Provided no consideration is made for the funds belonging to two different systems, errors in performance evaluation are inevitable. This research provides investors with both a more accurate and comprehensive evaluation method.

Long‐run determinants of savings rates in waemu countries: an empirical assessment from ardl bounds testing approach

Abstract: In this paper, we examine the long-run determinants of savings rates for seven member countries of the West African Economic and Monetary Union over the period 1970–2006. We use the bounds testing approach to cointegration developed by Pesaran et al. This methodology has several advantages with respect to other cointegration tests. The long-run determinants of savings rate vary across countries. Results reveal that the financial liberalization process undertaken at the end of 1989 and the existing monetary policy have not been effective to increase the domestic savings rates within the area.

The predictability of stock market returns in south africa: parametric vs. non-parametric methods

Abstract: This paper compares the forecasting performance of a sub-class of univariate parametric and non-parametric models in predicting stock market returns in South Africa. To account for conditional heteroskedasticity in stock returns data, the non-parametric model is generated by the conditional heteroskedastic non-linear autoregressive (NAR) model, while the parametric model is produced by the generalised autoregressive conditional heteroskedastic in mean (GARCH-M) model. The results of the paper show that the NAR as a non-parametric model performs better than the GARCH-M model in short-term forecasting horizon, and this indicates the importance of a distribution-free model in predicting stock returns in South Africa.

Can free trade agreements reduce economic vulnerability

Abstract: Free trade agreements between countries at different ends of the development spectrum have become increasingly common over the past decade. The impact that this type of arrangement has on trade flows has been widely modelled; however, the extent to which it can be expected to affect economic vulnerability is an aspect that has largely been overlooked. Yet as the economic distance between negotiating partners widens, the likelihood that changes in trade flows will affect the economic structure of the less developed partner increase. This paper explores the components of two prominent highly asymmetric negotiations – the Dominican Republic – Central America Free Trade Agreement and the European Union – Caribbean Forum Economic Partnership Agreement – to assess the channels through which the resulting organisation of trade may impact the vulnerability profile of the developing country partners. We find that these FTAs have the potential to address economic vulnerability in the developing country partners in ways that would not be possible in their absence.

Economic analysis on the urban–rural disparity in human capital in china

Abstract: With China’s economic development and capital accumulation in the industrial sectors, the human capital level of the labors moving from the rural areas could no longer meet the demand of the industrial sectors Therefore, “structural shortage of technical labor” emerged in the labor market as a result of excess of demand for high-skilled workers Previous literature mostly focused on the relationship between rural human capital level and labor movement, income change, and economic growth, but in this article, the authors focus on the study of the relative disparity of urban and rural human capital and labor movement, as well as the effect of the change of urban–rural human capital gap on industrial output, profit, and social welfare This article shows that bridging the urban–rural gap in respect of human capital level could not only improve the situation of the “structural shortage of technical labor” but also have a positive effect on the general social welfare

Designing economic partnership agreements to promote intra‐regional trade in acp countries

Abstract: The final details of Economic Partnership Agreements (EPAs) between the European Union (EU) and African, Caribbean and Pacific (ACP) are being negotiated over the next few years. This paper suggests how EPAs can facilitate intra-regional trade, given that promoting regional integration within ACP was an objective. Specifically, ACP regions may benefit by treating products traded within the region as sensitive for EPAs, hence postponing any reductions on tariffs on imports of such products from the EU. Less directly, if the EU supports measures that enhance the productivity and competitiveness of domestic producers, supply-side capacity can be improved.

Accounting for the size of the informal sector in Nigeria

Abstract: This paper uses a Real Business Cycle (RBC) model to analyse and simulate the effect of a negative oil-price shock on the informal sector in Nigeria. Secondly, the paper shows that RBC theory can account for the size of the informal sector as produced by the Multiple Indicator Multiple Cause (MIMIC) model. The MIMIC model has been criticised for generating estimates of the informal sector without an underlying theory. This paper shows that the model's estimates of the informal sector can be supported by theory.

An asean–eu fta, regional production sharing, and regional cohesion. focus on cambodia, laos and myanmar

Abstract: This article focuses on the potential effects of an Association of South East Asian Nations (ASEAN)–European Union (EU) Free Trade Agreement (FTA) for Cambodia, Laos and Myanmar (C-L-M), the least developed economies of ASEAN. The authors explore how the particular structure of the ASEAN production sharing network might shed light on the transmission of effects. Gravity models for intra-regional trade are estimated for that purpose. Whereas the existing computable general equilibrium (CGE) analyses consider C-L-M as one rest category, a country-level analysis for the C-L-M countries is presented. It is shown that it is not straightforward that C-L-M would win from an ASEAN–EU FTA. At best, marginal absolute positive effects might be expected for the C-L-M economies. In relative terms, an FTA is not likely to contribute to more economic (and political?) cohesion in the region. It is therefore argued that it makes sense to (re-) connect C-L-M to the negotiation process.

An alternative perspective on south africa's public debt, 1962-1994

Abstract: The history of public debt reflects the cumulative effect of fiscal decisions and real outcomes in the economy. In the South African case the published record on public debt distorts the historical perspective on the associated fiscal decisions. This note shows the impact of adjusting the South African public debt on an accrual basis to take account of two major obligations assumed in the first half of the 1990s, namely actuarial pension fund deficits and government debt of the apartheid homelands. The adjusted series is less volatile and rose less steeply between 1989 and 1996 than the official, cash based debt series. Failing to account for the evolution of these obligations exaggerates the impression of weak fiscal discipline in the early nineties and exemplary fiscal prudence in preceding decades. Keywords: South African public debt, fiscal discipline, accrual classification, pension fund deficits, sub-national debt JEL codes: H62, H63, G23

The effect of stressed economic conditions on systemic risk within the South African banking sector

Abstract: The credit crisis resulted in increases in credit, market and operational risk, but it may also have precipitated a surge in systemic risk. Measuring systemic risk as the price of insurance against distressed losses in the South African banking sector, this article attempts to determine whether the financial crisis has in fact resulted in an increase in systemic risk. Using probabilities of default and asset return correlations as systemic risk indicators, it is found that the financial crisis has indeed increased systemic risk in South Africa. The impact was, however, less severe than that experienced in other large international banks.

Purchasing power parity with rank tests for nonlinear cointegration in african countries

Abstract: This study applies nonlinear cointegration to assess exchange rates with the corresponding relative prices and aggregate price levels for 20 African countries. We find that a nonparametric rank test has higher power than parametric testing procedures; a true data-generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of purchasing power parity (PPP) from the nonparametric nonlinear point of view and provide robust evidence that clearly indicates PPP holds true for these countries. Hence, the long-run African countries exchange rate adjustments are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis in a nonlinear way.

Long memory in the volatility of an emerging fixed‐income market: evidence from south africa

Abstract: This paper tests for long memory in volatility of fixed-income returns; specifically, South Africa's local currency 10-year government bond, given that the characterisation of stochastic long-memory volatility is of interest and importance in portfolio and risk management. The long-memory parameter is estimated using methods based on wavelets, which have gained prominence in recent years. Evidence of long memory in fixed-income return volatility is conclusively demonstrated across a variety of volatility measures and wavelet forms. This finding suggests a pattern of time dependence, which may potentially be exploited to generate improved volatility forecasting performance especially over long horizons. This paper further extends the extant literature by comparing the predictive power of long-memory forecasts with those obtained from a standard (short-memory) generalised autoregressive conditional heteroskedasticity (GARCH) process. The results of this exercise suggest that the information content of long-memory models does not lead to improved forecast accuracy. The GARCH(1,1) model is shown to provide the best forecasts across most horizons (i.e. daily, weekly and monthly). Forecast performance is further revealed to be sensitive to the choice of volatility proxy used. Finally, the derived volatility forecasts are generally very close, and in some cases, almost indistinguishable.

When do vertical restraints harm competition? the economics-based approach and its application in the batsa case

Abstract: An “effects-based” or “economics-based” approach to competition policy requires a theory of harm that causally links a business practice and its allegedly anti-competitive effects and also weighs anti competitive effects against the pro-competitive effects of the practice. This implies a shift away from per se prohibitions of certain practices towards case-by-case analysis – a move that has been hotly debated, especially in Europe. Using a case study of the recently concluded British American Tobacco case, we study the core features of an effects-based approach to vertical restraints. We find the approach followed in the British American Tobacco South Africa case generally consistent with an effects-based analysis, but highlight some limitations.

Extreme value at risk: a scenario for risk management

Abstract: This paper uses the generalised extreme value (GEV) distribution to model the extreme losses that are likely to occur during market crashes, in the case of an investor who has long positions in stocks and currencies. The null hypothesis – which tests for normality of asset returns – is rejected due to asymmetry of these returns. We assume that the asymmetric behaviour and volatility of the returns are captured by the shape and scale parameters, respectively, of a GEV distribution. The data set includes stock indices for the United States, Japan, the United Kingdom, Germany, France and South Africa, and the South African rand exchange rates against the US dollar observed from 3 January 2005 to 30 December 2009. In addition, we divide this sample period into two periods: the pre-crisis period, from 3 January 2005 to 31 December 2007 and the crisis period, from 1 January 2008 to 30 December 2009. We compared the estimates of value at risk (VaR) using an extreme value theory (EVT) model, with the estimates derived from the traditional variance–covariance method and found that during the crisis the 99% extreme VaR estimates are more reliable as they lie within the Basel II green zone. These results suggest that, at higher quintiles, the VaR estimates based on EVT are reliable and more accurate than estimates from the traditional method.

The effects of banking relationship, legal origin, private equity and lead managers on the performance of West African IPO firms

Abstract: This paper examines the performance effects arising from initial primary offering (IPO) firms retaining their existing bank as a lead manager together with the effects of foreign and domestic lead managers, corporate insiders and private equity investors across West Africa. Using a unique and comprehensive sample of 37 locally listed IPO firm's from across West Africa, I find evidence of a considerable reduction in underpricing and costs of equity in firms listing on civil code as opposed to common law markets. Furthermore, I find evidence that firms employing their existing bank as lead manager have higher costs of equity while the employment of a foreign as opposed to domestic lead manager imparts a reduction in underpricing and cost of equity.

Regional business cycle phases in taiwan

Abstract: This paper uses both univariate and multivariate Markov-switching models to explore the characteristics of the regional business cycle phases in Taiwan In particular, this paper provides novel evidence regarding the “turning-point identification” puzzle in Taiwan that to date has not been fully resolved We find that the regime-switching behaviour of the common regional business cycle is consistent (or even precedes recession) with the business cycle expansion and contraction indicators used by the Council for Economic Planning and Development This finding suggests that the common regional business cycle identifies the turning point after the 1990s This finding also suggests that the employment growth index would be a great indicator for monitoring the business cycle in Taiwan