Cointegration, causality and international portfolio diversification : investigating potential benefits to a South African investor
- Authors: Msimanga, Nkululeko Lwazi
- Date: 2011
- Subjects: Cointegration , Econometrics , International finance , Stock exchanges -- South Africa , Stock exchanges -- Developing countries , Stock exchanges -- Developed countries , Investments -- South Africa , Portfolio management -- South Africa , Investment analysis , Autoregression (Statistics)
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:962 , http://hdl.handle.net/10962/d1002696 , Cointegration , Econometrics , International finance , Stock exchanges -- South Africa , Stock exchanges -- Developing countries , Stock exchanges -- Developed countries , Investments -- South Africa , Portfolio management -- South Africa , Investment analysis , Autoregression (Statistics)
- Description: Research studies on portfolio diversification have tended to focus on developed markets and paid less attention to emerging markets. Traditionally, correlation analysis has been used to determine potential benefits from diversification but current studies have shifted focus from correlation analysis to exploring cointegration analysis and other forms of tests such as the Vector Error Correction Methodology. The research seeks to find if it is beneficial for a South African investor to diversify their portfolio of emerging market equities over a long-term period. Daily weighted share indices for the period of January 1996 to November 2008 were collected and analysed through the application of the Johansen cointegration technique and Vector Error Correction Methodology. Granger Causality tests were also performed to established whether one variable can be useful in forecasting another variable. The study found that there was at least one statistically significant long-run relationship between the emerging markets. After testing for unit roots for all the share indices and their first difference using the Augmented Dickey-Fuller test (ADF), Philips-Perron and Kwiatkowski, Phillips, Schmidt, and Shin (KPSS) unit root tests, similar conclusions were m~de. All the unit root tests and their levels could not be rejected for all the series. However, unit root tests on the first differences were rejected, meaning that all series are of order 1(1) - evidence of cointegration. Simply put, emerging markets tend not to drift apart over time. This suggests that emerging markets offer limited benefits to investors who are looking to add some risk to their portfolios. In addition, the study also found evidence of both unidirectional and bidirectional causality (Granger-Cause tests) between markets. This implies that the conditions for a particular market are exogenous of the other market. The study concludes that emerging markets are gradually adopting the same profile as developed markets.
- Full Text:
- Date Issued: 2011
- Authors: Msimanga, Nkululeko Lwazi
- Date: 2011
- Subjects: Cointegration , Econometrics , International finance , Stock exchanges -- South Africa , Stock exchanges -- Developing countries , Stock exchanges -- Developed countries , Investments -- South Africa , Portfolio management -- South Africa , Investment analysis , Autoregression (Statistics)
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:962 , http://hdl.handle.net/10962/d1002696 , Cointegration , Econometrics , International finance , Stock exchanges -- South Africa , Stock exchanges -- Developing countries , Stock exchanges -- Developed countries , Investments -- South Africa , Portfolio management -- South Africa , Investment analysis , Autoregression (Statistics)
- Description: Research studies on portfolio diversification have tended to focus on developed markets and paid less attention to emerging markets. Traditionally, correlation analysis has been used to determine potential benefits from diversification but current studies have shifted focus from correlation analysis to exploring cointegration analysis and other forms of tests such as the Vector Error Correction Methodology. The research seeks to find if it is beneficial for a South African investor to diversify their portfolio of emerging market equities over a long-term period. Daily weighted share indices for the period of January 1996 to November 2008 were collected and analysed through the application of the Johansen cointegration technique and Vector Error Correction Methodology. Granger Causality tests were also performed to established whether one variable can be useful in forecasting another variable. The study found that there was at least one statistically significant long-run relationship between the emerging markets. After testing for unit roots for all the share indices and their first difference using the Augmented Dickey-Fuller test (ADF), Philips-Perron and Kwiatkowski, Phillips, Schmidt, and Shin (KPSS) unit root tests, similar conclusions were m~de. All the unit root tests and their levels could not be rejected for all the series. However, unit root tests on the first differences were rejected, meaning that all series are of order 1(1) - evidence of cointegration. Simply put, emerging markets tend not to drift apart over time. This suggests that emerging markets offer limited benefits to investors who are looking to add some risk to their portfolios. In addition, the study also found evidence of both unidirectional and bidirectional causality (Granger-Cause tests) between markets. This implies that the conditions for a particular market are exogenous of the other market. The study concludes that emerging markets are gradually adopting the same profile as developed markets.
- Full Text:
- Date Issued: 2011
Exchange rate pass-through to domestic prices in Kenya
- Authors: Mnjama, Gladys Susan
- Date: 2011
- Subjects: Kenya -- Economic conditions , Kenya -- Economic conditions -- Econometric models , Foreign exchange rates -- Kenya , Stocks -- Prices -- Kenya , Banks and banking -- Kenya , Cointegration , Econometrics , Inflation (Finance) -- Kenya
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:975 , http://hdl.handle.net/10962/d1002709 , Kenya -- Economic conditions , Kenya -- Economic conditions -- Econometric models , Foreign exchange rates -- Kenya , Stocks -- Prices -- Kenya , Banks and banking -- Kenya , Cointegration , Econometrics , Inflation (Finance) -- Kenya
- Description: In 1993, Kenya liberalised its trade policy and allowed the Kenyan Shillings to freely float. This openness has left Kenya's domestic prices vulnerable to the effects of exchange rate fluctuations. One of the objectives of the Central Bank of Kenya is to maintain inflation levels at sustainable levels. Thus it has become necessary to determine the influence that exchange rate changes have on domestic prices given that one of the major determinants of inflation is exchange rate movements. For this reason, this thesis examines the magnitude and speed of exchange rate pass-through (ERPT) to domestic prices in Kenya. In addition, it takes into account the direction and size of changes in the exchange rates to determine whether the exchange rate fluctuations are symmetric or asymmetric. The thesis uses quarterly data ranging from 1993:Ql - 2008:Q4 as it takes into account the period when the process of liberalization occurred. The empirical estimation was done in two stages. The first stage was estimated using the Johansen (1991) and (1995) co integration techniques and a vector error correction model (VECM). The second stage entailed estimating the impulse response and variance decomposition functions as well as conducting block exogeneity Wald tests. In determining the asymmetric aspect of the analysis, the study followed Pollard and Coughlin (2004) and Webber (2000) frameworks in analysing asymmetry with respect to appreciation and depreciation and large and small changes in the exchange rate to import prices. The results obtained showed that ERPT to Kenya is incomplete but relatively low at about 36 percent in the long run. In terms of asymmetry, the results showed that ERPT is found to be higher in periods of appreciation than depreciation. This is in support of market share and binding quantity constraints theory. In relation to size changes, the results show that size changes have no significant impact on ERPT in Kenya.
- Full Text:
- Date Issued: 2011
- Authors: Mnjama, Gladys Susan
- Date: 2011
- Subjects: Kenya -- Economic conditions , Kenya -- Economic conditions -- Econometric models , Foreign exchange rates -- Kenya , Stocks -- Prices -- Kenya , Banks and banking -- Kenya , Cointegration , Econometrics , Inflation (Finance) -- Kenya
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: vital:975 , http://hdl.handle.net/10962/d1002709 , Kenya -- Economic conditions , Kenya -- Economic conditions -- Econometric models , Foreign exchange rates -- Kenya , Stocks -- Prices -- Kenya , Banks and banking -- Kenya , Cointegration , Econometrics , Inflation (Finance) -- Kenya
- Description: In 1993, Kenya liberalised its trade policy and allowed the Kenyan Shillings to freely float. This openness has left Kenya's domestic prices vulnerable to the effects of exchange rate fluctuations. One of the objectives of the Central Bank of Kenya is to maintain inflation levels at sustainable levels. Thus it has become necessary to determine the influence that exchange rate changes have on domestic prices given that one of the major determinants of inflation is exchange rate movements. For this reason, this thesis examines the magnitude and speed of exchange rate pass-through (ERPT) to domestic prices in Kenya. In addition, it takes into account the direction and size of changes in the exchange rates to determine whether the exchange rate fluctuations are symmetric or asymmetric. The thesis uses quarterly data ranging from 1993:Ql - 2008:Q4 as it takes into account the period when the process of liberalization occurred. The empirical estimation was done in two stages. The first stage was estimated using the Johansen (1991) and (1995) co integration techniques and a vector error correction model (VECM). The second stage entailed estimating the impulse response and variance decomposition functions as well as conducting block exogeneity Wald tests. In determining the asymmetric aspect of the analysis, the study followed Pollard and Coughlin (2004) and Webber (2000) frameworks in analysing asymmetry with respect to appreciation and depreciation and large and small changes in the exchange rate to import prices. The results obtained showed that ERPT to Kenya is incomplete but relatively low at about 36 percent in the long run. In terms of asymmetry, the results showed that ERPT is found to be higher in periods of appreciation than depreciation. This is in support of market share and binding quantity constraints theory. In relation to size changes, the results show that size changes have no significant impact on ERPT in Kenya.
- Full Text:
- Date Issued: 2011
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