Financial instability in South Africa : trends and interactions within the financial markets
- Authors: Shikwambana, Jamela
- Date: 2007 , 2013-08-06
- Subjects: Finance -- South Africa , Financial institutions -- South Africa , Economic stabilization -- South Africa , Stock exchanges -- South Africa , Stocks -- Prices -- South Africa , Interest rates -- South Africa , Equilibrium (Economics)
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1043 , http://hdl.handle.net/10962/d1005911 , Finance -- South Africa , Financial institutions -- South Africa , Economic stabilization -- South Africa , Stock exchanges -- South Africa , Stocks -- Prices -- South Africa , Interest rates -- South Africa , Equilibrium (Economics)
- Description: This study seeks to investigate the trends and interactions of market volatility as a source of instability in the South African financial markets. Financial instability can be manifested in the form of banking and currency crisis, institutional failures and extreme asset price volatility. This study, however, focuses on a single aspect of financial instability - asset price volatility. Asset price volatility reflects changes in market expectations as investors react to such changes, and thus on its own is not necessarily a source of instability. However, volatility spillovers can propagate volatility shocks across the market, increasing the risk of widespread instability. Using a combination of graphical and trend analysis as well as more formal estimation techniques, the study examined volatility in the stock, money and foreign exchange markets. To obtain estimates of market volatility, the study experimented with various volatility models that include the GARCH, TARCH and EGARCH. An analysis of volatility interactions and the transmission of volatility shocks across the market is crucial to understanding financial instability. To examine volatility interaction and the transmission of volatility shocks, a VAR model was estimated. This framework allowed us to examine the propagation of shocks across the markets. Volatility in the financial markets was found to be highly persistent and in the case of exchange rates, volatility was also characterised by an increasing trend. Significant linkages between the financial markets were found. The links also extended to the volatility relationship as evidenced by significant volatility spillovers across the markets. While volatility spillovers from the money market were found in the stock market and the foreign exchange market, no volatility spillovers from these markets were found in the money market. Thus the money market was identified as the major source of volatility spillovers and shocks in the financial markets. These results highlighted the role of monetary policy in the financial system, specifically the need to make monetary policy stable and predictable to ensure that interest rate shocks are not an additional source of instability. , KMBT_363 , Adobe Acrobat 9.54 Paper Capture Plug-in
- Full Text:
- Date Issued: 2007
- Authors: Shikwambana, Jamela
- Date: 2007 , 2013-08-06
- Subjects: Finance -- South Africa , Financial institutions -- South Africa , Economic stabilization -- South Africa , Stock exchanges -- South Africa , Stocks -- Prices -- South Africa , Interest rates -- South Africa , Equilibrium (Economics)
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:1043 , http://hdl.handle.net/10962/d1005911 , Finance -- South Africa , Financial institutions -- South Africa , Economic stabilization -- South Africa , Stock exchanges -- South Africa , Stocks -- Prices -- South Africa , Interest rates -- South Africa , Equilibrium (Economics)
- Description: This study seeks to investigate the trends and interactions of market volatility as a source of instability in the South African financial markets. Financial instability can be manifested in the form of banking and currency crisis, institutional failures and extreme asset price volatility. This study, however, focuses on a single aspect of financial instability - asset price volatility. Asset price volatility reflects changes in market expectations as investors react to such changes, and thus on its own is not necessarily a source of instability. However, volatility spillovers can propagate volatility shocks across the market, increasing the risk of widespread instability. Using a combination of graphical and trend analysis as well as more formal estimation techniques, the study examined volatility in the stock, money and foreign exchange markets. To obtain estimates of market volatility, the study experimented with various volatility models that include the GARCH, TARCH and EGARCH. An analysis of volatility interactions and the transmission of volatility shocks across the market is crucial to understanding financial instability. To examine volatility interaction and the transmission of volatility shocks, a VAR model was estimated. This framework allowed us to examine the propagation of shocks across the markets. Volatility in the financial markets was found to be highly persistent and in the case of exchange rates, volatility was also characterised by an increasing trend. Significant linkages between the financial markets were found. The links also extended to the volatility relationship as evidenced by significant volatility spillovers across the markets. While volatility spillovers from the money market were found in the stock market and the foreign exchange market, no volatility spillovers from these markets were found in the money market. Thus the money market was identified as the major source of volatility spillovers and shocks in the financial markets. These results highlighted the role of monetary policy in the financial system, specifically the need to make monetary policy stable and predictable to ensure that interest rate shocks are not an additional source of instability. , KMBT_363 , Adobe Acrobat 9.54 Paper Capture Plug-in
- Full Text:
- Date Issued: 2007
The demand for broad money (M2) in Botswana
- Authors: Tsheole, Thapelo
- Date: 2007
- Subjects: Monetary policy -- Botswana , Demand for money -- Botswana , Botswana -- Economic conditions , Quantity theory of money
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:966 , http://hdl.handle.net/10962/d1002700 , Monetary policy -- Botswana , Demand for money -- Botswana , Botswana -- Economic conditions , Quantity theory of money
- Description: There has been extensive theoretical and empirical research on the subject of demand for money function. This particularly stems from the important role demand for money plays in macroeconomic analysis, especially in the design and implementation of monetary policy. The increase in studies, especially in developing countries, can also be attributed to a number of factors like: the impact of moving towards flexible exchange rate regimes, globalisation of financial markets, ongoing financial liberalisation, innovations in domestic financial products, the advancement in econometrics techniques and other country-specific events. This study estimates and examines the nature and stability of the demand for broad money (M2) in Botswana. This is particularly important in that the usefulness of a money demand function in the conduct of monetary policy depends crucially on its stability. The stability of the money demand function is crucial in that a stable money demand function would mean that the quantity of money is predictably related to a set of key economic variables linking money and the real economic sector. Therefore, this will help central banks to select appropriate monetary policy actions. Based on the findings, the study also proposes policy interventions. The vast majority of the literature on demand for money has underscored the fact that variable selection and representation, and the framework chosen are the two major issues relevant to modelling and estimation of the demand for money function. In modelling and estimating the demand for money function in Botswana, this study surveys a stream of theoretical and empirical literature on money demand in developed and developing countries, including countries that have similar financial sector similar to Botswana. Due consideration is also given to the macroeconomic and financial sector development in Botswana to help in the identification of the variables that are included in the demand for money equation. Most importantly, this helped in getting meaningful results that are free from theoretical and estimation problems. In particular, this study applied the multivariate cointegration approach as proposed by Johansen (1988) and Johansen and Juselius (1990) to estimate the relationship between broad money (M2), real income, interest rate, South African treasury bill rate, inflation rate and US dollar/pula bilateral exchange rate. The study obtains one unique long run relationship between money and the scale and opportunity cost variables. The coefficients of the long run relationship are then modelled along the general to specific approach as proposed by Campos, Ericsson and Hendry (2005). In this type of approach the general model is reduced by sequential elimination of statistically insignificant variables and checking the validity of the reductions at every stage to ensure congruence of the finally selected parsimonious model. In accordance with the economic quantity theory of money, the long run income elasticity obtained is 0.8021, which is close to the value one (unitary) suggested by economic theory. The coefficients of real income, exchange and inflation rate have the expected positive signs and were significant in the long run. Therefore, the long run demand for money (M2) in Botswana was found to be positively affected by real income, inflation rate and exchange rate. The lack of statistical significant of the own rate of money (88 day commercial bank deposit rate) and the foreign opportunity cost variable (South African Treasury bill rate) is attributed to multi-collinearity problems between these two interest rates. This could be caused by the fact that short term rates in Botswana are very responsive to movements in the money markets rates in South Africa. The short run dynamics of the demand for money function shows the slow speed of adjustment to equilibrium of about 2.9 percent in the first quarter and this is reflective of the lack of sufficient availability of banking services and the low returns on financial assets which could allow economic agents to re-establish equilibrium levels of money holdings faster. The final parsimonious model obtained clearly reflects a well specified stable demand for money function. Therefore, based on the findings we can be precise in stating that targeting a monetary aggregate can be a viable policy for the monetary authorities in Botswana.
- Full Text:
- Date Issued: 2007
- Authors: Tsheole, Thapelo
- Date: 2007
- Subjects: Monetary policy -- Botswana , Demand for money -- Botswana , Botswana -- Economic conditions , Quantity theory of money
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:966 , http://hdl.handle.net/10962/d1002700 , Monetary policy -- Botswana , Demand for money -- Botswana , Botswana -- Economic conditions , Quantity theory of money
- Description: There has been extensive theoretical and empirical research on the subject of demand for money function. This particularly stems from the important role demand for money plays in macroeconomic analysis, especially in the design and implementation of monetary policy. The increase in studies, especially in developing countries, can also be attributed to a number of factors like: the impact of moving towards flexible exchange rate regimes, globalisation of financial markets, ongoing financial liberalisation, innovations in domestic financial products, the advancement in econometrics techniques and other country-specific events. This study estimates and examines the nature and stability of the demand for broad money (M2) in Botswana. This is particularly important in that the usefulness of a money demand function in the conduct of monetary policy depends crucially on its stability. The stability of the money demand function is crucial in that a stable money demand function would mean that the quantity of money is predictably related to a set of key economic variables linking money and the real economic sector. Therefore, this will help central banks to select appropriate monetary policy actions. Based on the findings, the study also proposes policy interventions. The vast majority of the literature on demand for money has underscored the fact that variable selection and representation, and the framework chosen are the two major issues relevant to modelling and estimation of the demand for money function. In modelling and estimating the demand for money function in Botswana, this study surveys a stream of theoretical and empirical literature on money demand in developed and developing countries, including countries that have similar financial sector similar to Botswana. Due consideration is also given to the macroeconomic and financial sector development in Botswana to help in the identification of the variables that are included in the demand for money equation. Most importantly, this helped in getting meaningful results that are free from theoretical and estimation problems. In particular, this study applied the multivariate cointegration approach as proposed by Johansen (1988) and Johansen and Juselius (1990) to estimate the relationship between broad money (M2), real income, interest rate, South African treasury bill rate, inflation rate and US dollar/pula bilateral exchange rate. The study obtains one unique long run relationship between money and the scale and opportunity cost variables. The coefficients of the long run relationship are then modelled along the general to specific approach as proposed by Campos, Ericsson and Hendry (2005). In this type of approach the general model is reduced by sequential elimination of statistically insignificant variables and checking the validity of the reductions at every stage to ensure congruence of the finally selected parsimonious model. In accordance with the economic quantity theory of money, the long run income elasticity obtained is 0.8021, which is close to the value one (unitary) suggested by economic theory. The coefficients of real income, exchange and inflation rate have the expected positive signs and were significant in the long run. Therefore, the long run demand for money (M2) in Botswana was found to be positively affected by real income, inflation rate and exchange rate. The lack of statistical significant of the own rate of money (88 day commercial bank deposit rate) and the foreign opportunity cost variable (South African Treasury bill rate) is attributed to multi-collinearity problems between these two interest rates. This could be caused by the fact that short term rates in Botswana are very responsive to movements in the money markets rates in South Africa. The short run dynamics of the demand for money function shows the slow speed of adjustment to equilibrium of about 2.9 percent in the first quarter and this is reflective of the lack of sufficient availability of banking services and the low returns on financial assets which could allow economic agents to re-establish equilibrium levels of money holdings faster. The final parsimonious model obtained clearly reflects a well specified stable demand for money function. Therefore, based on the findings we can be precise in stating that targeting a monetary aggregate can be a viable policy for the monetary authorities in Botswana.
- Full Text:
- Date Issued: 2007
The term structure of interest rates and economic activity in South Africa
- Authors: Shelile, Teboho
- Date: 2007
- Subjects: Finance -- South Africa , Monetary policy -- South Africa , Interest rates -- South Africa , Economic development -- South Africa , South Africa -- Economic conditions -- 21st century
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:994 , http://hdl.handle.net/10962/d1002729 , Finance -- South Africa , Monetary policy -- South Africa , Interest rates -- South Africa , Economic development -- South Africa , South Africa -- Economic conditions -- 21st century
- Description: Many research papers have documented the positive relationship between the slope of the yield curve and future real economic activity in different countries and different time periods. One explanation of this link is based on monetary policy. The forecasting ability of the term spread on economic growth is based on the fact that interest rates reflect the expectations of investors about the future economic situation when deciding about their plans for consumption and investment. This thesis examined the predictive ability of the term structure of interest rates on economic activity, and the effects of different monetary policy regimes on the predictive ability of the term spread. The South African experience offers a unique opportunity to examine this issue, as the country has experienced numerous monetary policy frameworks since the 1970s. The study employed the Generalised Method Moments technique, since it is considered to be more efficient than Ordinary Least Squares. Results presented in this thesis established that the term structure successfully predicted real economic activity during the entire research period with the exception of the last sub-period (2000-2004) when using the multivariate model. In the periods of financial market liberalisation and interest rates deregulation the term structure was found to be a better predictor of economic activity in South Africa. These findings emphasise the importance of considering the prevailing economic environment in testing the term structure theory.
- Full Text:
- Date Issued: 2007
- Authors: Shelile, Teboho
- Date: 2007
- Subjects: Finance -- South Africa , Monetary policy -- South Africa , Interest rates -- South Africa , Economic development -- South Africa , South Africa -- Economic conditions -- 21st century
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:994 , http://hdl.handle.net/10962/d1002729 , Finance -- South Africa , Monetary policy -- South Africa , Interest rates -- South Africa , Economic development -- South Africa , South Africa -- Economic conditions -- 21st century
- Description: Many research papers have documented the positive relationship between the slope of the yield curve and future real economic activity in different countries and different time periods. One explanation of this link is based on monetary policy. The forecasting ability of the term spread on economic growth is based on the fact that interest rates reflect the expectations of investors about the future economic situation when deciding about their plans for consumption and investment. This thesis examined the predictive ability of the term structure of interest rates on economic activity, and the effects of different monetary policy regimes on the predictive ability of the term spread. The South African experience offers a unique opportunity to examine this issue, as the country has experienced numerous monetary policy frameworks since the 1970s. The study employed the Generalised Method Moments technique, since it is considered to be more efficient than Ordinary Least Squares. Results presented in this thesis established that the term structure successfully predicted real economic activity during the entire research period with the exception of the last sub-period (2000-2004) when using the multivariate model. In the periods of financial market liberalisation and interest rates deregulation the term structure was found to be a better predictor of economic activity in South Africa. These findings emphasise the importance of considering the prevailing economic environment in testing the term structure theory.
- Full Text:
- Date Issued: 2007
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