Finance

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Testing the efficiency of the South African futures market for white maize : 1996-2006.
(2010) McCullough, Kerry-Ann Frances.; Strydom, Barry Stephen.
As in PDF.
An analysis of herd behaviour in the South African stock exchange.
(2013) Niyitegeka, Olivier.; Tewari, Devi Datt.
The stock market is an important part of the economy of a country. It plays a crucial role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. This is the reason that the government, industry and the country in general keep a close watch on the happenings of the stock market. It is in this frame of mind that the current study investigates the presence of herd behaviour in the South African stock market. Herd behaviour occurs when investors disregard their individual information and base their trading decision on the actions of others. Herd behaviour was measured by testing whether or not there is a negative relationship between the dispersion of stock returns and the market return. The study also investigates whether herd behaviour is asymmetric in different market conditions, namely bull versus bear markets, highly volatile markets versus less volatile markets and high trading volumes versus low trading volumes. The results point towards a considerable presence of herd behaviour among investors at the Johannesburg Stock Exchange (JSE). An analysis of the asymmetric effect of herding on various market conditions reveals that herding is more pronounced during a bull market than a bear market, during low trading volume rather than high trading volume periods and is more prevalent during periods of low market volatility than in highly volatile markets. This study also used the Autoregressive Distributed Lag (ARDL) approach to cointegration in order to examine short- and long- term dynamics of investors’ herd behaviour at the JSE. The study noted that herd behaviour is not instantaneous; rather it takes place with a lapse in time. However, the unrestricted error correction results suggest that herd behaviour has a rather high speed of adjustment, implying that herding is a short-lived phenomenon.
An analysis of herd behaviour in the South African stock exchange.
(2013) Niyitegeka, Olivier.; Tewari, Devi Datt.
The stock market is an important part of the economy of a country. It plays a crucial role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. This is the reason that the government, industry and the country in general keep a close watch on the happenings of the stock market. It is in this frame of mind that the current study investigates the presence of herd behaviour in the South African stock market. Herd behaviour occurs when investors disregard their individual information and base their trading decision on the actions of others. Herd behaviour was measured by testing whether or not there is a negative relationship between the dispersion of stock returns and the market return. The study also investigates whether herd behaviour is asymmetric in different market conditions, namely bull versus bear markets, highly volatile markets versus less volatile markets and high trading volumes versus low trading volumes. The results point towards a considerable presence of herd behaviour among investors at the Johannesburg Stock Exchange (JSE). An analysis of the asymmetric effect of herding on various market conditions reveals that herding is more pronounced during a bull market than a bear market, during low trading volume rather than high trading volume periods and is more prevalent during periods of low market volatility than in highly volatile markets. This study also used the Autoregressive Distributed Lag (ARDL) approach to cointegration in order to examine short- and long- term dynamics of investors’ herd behaviour at the JSE. The study noted that herd behaviour is not instantaneous; rather it takes place with a lapse in time. However, the unrestricted error correction results suggest that herd behaviour has a rather high speed of adjustment, implying that herding is a short-lived phenomenon.
Firm investment behavior: the role of leverage, liquidity and cash flow volatility: African evidence.
(2017) Edson, Vengesai.; Kwenda, Farai.
The main corporate financial strategic pillars that drive a firm’s value are mainly financing and investment. Conventional finance theories hold that leverage is power that amplifies investment. Cash flows and liquidity are the lifeblood of any firm which gives life to and fuels higher investments. To this end, there is an indispensable interplay between financing, investment, cash flows and liquidity. Existing studies on investment decisions are largely centered on developed economies but no studies, to the best of my knowledge, have been done in developing economies like those in Africa. However, there is persistent behavioural and structural heterogeneity between firms in developing and developed economies, resulting in diverging economic implications for a firm’s behaviour. This study was motivated by the observation that leverage levels in African firms are generally low but now on the rise as compared to developed economies, investment levels are stagnant, low liquidity of stock markets coupled with cash flows that are too volatile. Given the progressively vital role developing economies have for global growth, this study sought to find how this trend in leverage levels is impacting on investment in Africa, a concern for the global economy. Given the inseparability of investment and leverage from liquidity and cash flow, the study also examines the role of liquidity and cash flows in investment decision making. This study extends the reduced form investment model to a dynamic panel data model estimated with a novel technique; the generalised method of moments (GMM) on the panel data of 815 listed African non-financial firms. The methodology controls for unobservable heterogeneity, endogeneity, autocorrelation, heteroscedasticity and probable bi-directional relationships. The study found evidence that leverage constrains investment and its impact is more pronounced in firms with low-growth opportunities. These results suggest that investment policy does not solely depend on the neoclassical fundamentals but also on financing strategy and are inclined to the hypothesis that leverage plays a disciplinary role to avoid over-investment. The study also found that stock market liquidity is associated with higher average capital expenditures. The effect of liquidity on investment was found to be heterogeneous with financial constraints and growth opportunities. The study reveals that cash flows are not only an important determinant of investment decisions, but the variability of the cash flows also has a significant bearing on the investment policy. The experimental analysis shows that an increase in debt may reduce the negative effect of leverage on investment. However, the shallow, illiquid debt markets of African firms would mean higher costs and this countermands any benefits from debt. Based on these, findings, the study recommends that African firms should consider relying more on internally generated funds and the stock markets so as not to suppress any available cash flows and improved liquidity. African firms should trade off the effects of managing volatility and the resulting negative impact of cash flow volatility on investment levels.
Liquidity management practices of banks in emerging market economies under Basel III liquidity regulations.
(2017) Mashamba, Tafirei.; Kwenda, Farai.
During the 2007 to 2009 global financial crisis, several banks experienced liquidity problems, largely as a result of liquidity management practices they pursued prior to the crisis. In an effort to strengthen banks’ liquidity management practices, the Basel Committee on Banking Supervision announced harmonized and binding liquidity requirements for banks in December 2010 under the Basel III framework in the form of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The LCR aims to enhance banks’ short term resilience to liquidity stress lasting 30 calendar days by requiring them to maintain sufficient stock of high quality liquid assets. The NSFR seeks to limit banks’ asset and liability mismatch by demanding them to maintain a balanced funding mix that is commensurate with their asset base and off-balance sheet activities. Thus, liquidity standards are deliberately aimed at affecting banks’ liquidity management practices. However, the new liquidity regulations introduced by the Basel Committee on Banking Supervision may bring a new source of intertemporal assets and liabilities choices that are currently absent in banks’ decision making processes. Moreover, as with all regulations, liquidity standards may or may not produce their expected goals. Accordingly, this study sought to examine the impact of the Basel III liquidity standards, in particular, the LCR which is now binding on liquidity management practices of banks operating in emerging market economies. Employing the two-step system Generalised Method of Moments estimation technique on a panel dataset of forty commercial banks operating in eleven emerging market economies over the period 1 January 2011 to 31 December 2016, the results obtained revealed that banks in emerging market economies have target liquidity ratios they pursue and partially adjust their liquidity due to financial frictions. Furthermore, the study established that the Basel III LCR liquidity regulation complemented liquidity management practices of banks in emerging markets. In terms of the behavioral response of banks in emerging markets to liquidity standards, the study found that, on the asset side, banks in emerging markets appear to have elevated their stock of high quality liquid assets and on the liability side, it seems banks in emerging markets increased retail deposits, equity and long term funding. Moreover, empirical results demonstrated that the LCR charge did not adversely affect the profitability of banks in emerging markets. Among other things, these findings suggest that the LCR liquidity regulation is less effective in jurisdictions with high liquidity reserves. In addition, changes in banks’ funding mix caused by regulatory pressure stemming from the LCR rule may lead to stiff competition for retail deposits among banks. The study therefore recommends that regulators and policy makers should monitor competition for retail deposits to prevent reversal of financial sector stability gains achieved by the liquidity regulations. The study also advocates for the adoption of the Basel III liquidity standards in jurisdictions with commercial banks that depend more on capital markets for funding.
Determinants of spending habits: a case study of University of KwaZulu-Natal students.
(2017) Obagbuwa, Oloyede.; Kwenda, Farai.
As the cost of university education continues to increase, university students’ spending habits have become topical. Good spending habits among students will guarantee their financial stability. Spending habits are an aspect of financial behaviour; a component of financial literacy. Financial literacy comprises three components: financial knowledge, financial attitudes, and financial behaviours. The relationship between these components has been examined, especially among university students. However, the relationship between financial knowledge, financial attitude together with demographic characteristics and spending habits have not been welladdressed in the extant literature, particularly among university student’s in South Africa. This study aims to fill the knowledge gap on students’ spending by examining the determinants of their (university student’s) spending habits. This study uses spending habits as the dependable variable, and financial knowledge, financial attitude, gender, age, family background, racial group, years in university, the course of study and financial aid as independent variables. The study employed quantitative research method; it used questionnaire adapted from previous studies. The reliability of the scales for the constructs was confirmed using Cronbach Alpha and the coefficient values more than 0.70. A total of 479 completed questionnaires were collected and used for the study. The study employed Statistical Packages for Social Sciences (SPSS 24) to analyse the data. Descriptive statistics were used to analyse the demographic characteristics and the results were presented in tables and charts. Binary Logistic Regression and ANOVA were used to examine the relationship between the explanatory variables and the dependable variable. The finding revealed that financial attitude can influence students’ spending habits while other explanatory variables did not have a significant influence on students’ spending habits. The study further sought to investigate the significant relationship between gender and spending habits, the course of study and spending habits, and racial groups and spending habits using Crosstabulation and Chi-Square analysis. The findings shows that there is no statistically significant relationship between gender and spending habits, the course of study and spending habits, and racial groups and spending habits of the respondents. These findings suggest that a financial literacy programme by the university authority with emphasis on financial attitudes will enhance the good spending habits of the students. However, the research findings only reflect the responses of the study population of the College of Law and Management as well as College of Humanities of the University of KwaZulu-Natal.
Financial risk management and bank profitability in South African banks.
(2017) Mafu, Sibusiso Mfundo.; Sibanda, Mabutho.
This study examined the connection between financial risk management and banks’ profitability in a South African context. The relationship was segmented into three major financial risks; credit risk, liquidity risk and market risk. Theory assumes risk to have a negative relationship with profitability; however, some studies have proved otherwise. This study used top five banks in South Africa over a10-year period spanning 2006 to 2015 and employed Fixed Effect Model based on the Hausman Test to estimate the relationship between credit, liquidity and market risk with profitability measure return on equity. “The credit risk indicators (independent variables) employed in this study are non-performing loans to total loans, and loans and advances to total deposit. Two control variables leverage ratio and logarithm of total asset as proxy for firm size were also used. All variables were regressed against ROE as a profitability measure (dependent variable). The findings indicate a significant relationship between profitability and non-performing loans, and leverage ratio at 1%, loans and advances to total deposit at 5%; while firm size (log total assets) is significant at 10% significance level. The liquidity risk indicators (independent variables) employed are loans and advances to total deposit, non-performing loans to total loans, LOG(total assets), market capitalisation to total assets, non-deposit dependence/external finance, equity to total assets. Control variables are non-performing loans, firm size (log total assets), GDP growth rate, and ratio of financing gap. The findings indicate that loans and advances to total deposit, non-performing loans, market capitalisation to total assets, and non-deposit dependence are significant at 1% significance level, firm size (log total assets), at 5% ; while equity to total assets, GDP growth and ratio of financing gap are insignificant. The market risk indicators (independent variables) employed with three main variables are market capitalisation (log stock) to proxy equity risk, exchange rate to proxy foreign exchange risk, and lending interest rate to proxy interest rate risk. Three control variables were employed; inflation rate, GDP and monetary supply (M3). The findings show market capitalisation (log stock) is significant at 1%, exchange rate and GDP are significant at 10% significance level. An insignificant and negative relationship with lending interest rate was found. With the control variables, the findings showed that there is an insignificant and positive relationship between inflation rate and return on equity and a negative relationship between GDP and return on equity. The results are in conflict with the expected sign. The study suggests that, with regards to credit risk, banks in South Africa should enhance their capacity in credit analysis and loan administration while the regulatory authorities should pay more attention to banks’ compliance to relevant regulatory requirements by the Basel Committee on Banking Supervision, put more effort in attracting deposits as they are a major determinant of liquidity followed by external funding liability and seek for effective hedging strategies to deal with the market risk volatilities.
Competition, regulation and stability in Sub-Saharan Africa commercial banks.
(2017) Akande, Joseph Olorunfemi.; Kwenda, Farai.
Abstract available on the PDF.
The nexus between mobile phones diffusion, financial inclusion and economic growth: evidence on African countries.
(2018) Chinoda, Tough.; Kwenda, Farai.
The following thesis comprises three discrete empirical essays on the interplay among mobile phones diffusion, financial inclusion and economic growth in Africa. The first essay examines the condition of financial inclusion and its determinants in Africa. Using the World Development Indicators and the Principal Component Analysis to compute the financial inclusion index for 49 African countries over the period 2004 to 2016, the study finds low levels of financial inclusion in Africa compared to other regions. The region is also characterised by large financial inclusion gaps as shown by the minimum and maximum financial inclusion levels of 0 percent and 82 percent respectively. Since policymakers have over the past decade embraced both financial inclusion and economic growth as key policy initiatives, the second essay examines the interplay between financial inclusion and economic growth in terms of the transmission effect and nature of causality. To the best of the researcher’s knowledge, this is the first study to explore the transmission effect between financial inclusion and economic growth using a unique and robust Cointegrated Panel Structural Vector Autoregressive model. The study finds the existence of a cointegrating relationship between financial inclusion and economic growth. It also provides evidence that the relationship between financial inclusion and economic growth in Africa is growth-led supporting the demand following hypothesis. The increased internet-enabled phones adoption in Africa has also caused much optimism and speculation regarding its effects on financial inclusion. Policymakers, various studies and the media have all vaunted the potentials of mobile phones for financial inclusion. Therefore, this study examines the interplay between mobile phones and financial inclusion in Africa for the 2004-2016 period using pairwise Granger causality test and found that mobile phones Granger cause financial inclusion. The literature on financial inclusion has identified high-quality institutions and governance as the determinants of financial inclusion. Lack of deeper understanding of these issues results in ill-informed policy designs. Despite the cascading literature on issues impacting financial inclusion, the empirical literature on the impact of institutional quality and governance on financial inclusion are rare. Therefore, the third essay evaluates the impacts of institutional quality and governance on financial inclusion in Africa. Applying the two-step system generalised method of moments model, the study finds a positive relationship between institutional quality, governance and financial inclusion, indicating that good governance and economic freedom can lead to increases in financial inclusion. The study concluded that African countries have low levels of financial inclusion with a strong relationship between financial inclusion and other variables such as mobile phones diffusion, bank competition, financial stability, institutional quality and governance. The study recommended institutions to make the most out of the high concentration of the rural population to rollout high-volume transactions, rather than clustering in areas with the high-value transaction and to craft policies that remove restrictions to entrance in the banking sector thereby enhancing bank competition. Policymakers should also not just focus on enhancing financial inclusion, without corresponding improvements in institutional quality, governance, financial sector size, financial stability and financial sector development as they positively contribute to financial inclusion. The study also recommended the implementation of pro-growth policies and a review of existing banking sector policies to eradicate unnecessary barriers to financial inclusion.
Capital structure and financial performance of South African state-owned entities.
(2019) Marimuthu, Ferina.; Kwenda, Farai.
Abstract available on the PDF.
The performance evaluation and style analysis of socially responsible investment funds in South Africa.
(2019) Naidoo, Jeremy Ebenezer.; Peerbhai, Faeezah.
Socially Responsible Investing (SRI) has been widely acknowledged as an integral part of modern-day investment practice, gaining significant growth since its early history. While SRI consciousness has grown steadily in South Africa; there is a paucity of research on the effect of its restrictions on investor’s portfolios. Considering the limited studies documented, the extant research delves into the profile of the South African responsible investing industry, highlighting its vast development and investment strategies. To assess the viability of socially responsible investments and provide investors with the ability to make more informed decisions, scholars in finance have raised pertinent questions, primarily focused on the impact of utilising environmental, social and governance (ESG) criteria on socially responsible investment performance. As such, this study aimed to explore this research domain and position its results within the currently inconclusive literature. The objective of the study was to evaluate active SRI in South Africa, with a focus exclusively on SRI funds. The approach followed was twofold. Firstly, by employing the Fama and French 3-factor model and Carhart 4-factor model, the study assessed the risk-adjusted performance of SRI funds relative to their conventional counterparts (conventional funds and passive benchmarks) over two evaluation periods (2009-2013 and 2014-2018). The findings showed that after significant underperformance of SRI funds in the earlier period, they tend to perform better in the latter period. The improvement in performance over the study was termed a ‘learning effect’ - the older funds have finally caught up with conventional funds (or outperformed them) while funds that were launched recently still trail their conventional peers. Furthermore, the models showed similar findings for the market loading, size (SMB) and value (HML) factors – SRI funds exhibited a lower sensitivity to market fluctuations as compared to non-SRI funds, a higher exposure to small-cap stocks, and exhibited a larger exposure to growth stocks in the earlier period (2009-2013) while a greater exposure to value stocks in the latter period (2014-2018). The second research aim of the study made use of Return-Based Style Analysis (RBSA) to identify and compare the determinants of SRI funds to non-SRI funds (conventional funds). To date, this method has not been previously applied to SRI funds in South Africa. The findings of the RBSA model showed that SRI funds, on average, exhibited moderate to high levels of active management, which were also found to be substantially higher than non-SRI funds. This indicated that the imposition of additional constraints by SRI funds (through SRI criteria) does not hinder the fund manager from adding value through active management. Furthermore, the classifications of SRI funds were shown, on average, to comply with their investment mandates and relevant regulation, i.e. correctly classified. Taking into account the asset class exposures of SRI funds, the regression results showed that these exposures were found, on average, to almost mirror the exposures of the funds’ actual asset holdings. With respect to the comparative style analysis of SRI and non-SRI funds, a distinguishable asset class exposure was shown whereby SRI funds were found to have a value-tilt while non-SRI funds exhibited a growth-tilt over the evaluation period.
The risk-return relationship and volatility feedback in South Africa: a nonparametric Bayesian approach.
(2020) Dwarika, Nitesha.; Moores-Pitt, Peter Brian Denton.; Chifurira, Retius.
The risk-return relationship is a fundamental concept in finance and economic theory and is also known as the “first fundamental law” in finance. Traditionally, the risk-return relationship is known to help assist individuals in the construction of an efficient portfolio where a desired risk and return profile is tailored to their needs. However, it is a source of much more valuable information to various market participants such as bankers, investors, policy makers and researchers alike. There are a number of investment strategies, policy frameworks, theories and asset pricing models built on the empirical result of the risk-return relationship. Hence, the topic of the risk-return relationship is of broad importance. It has been widely investigated on an international scale, especially by developed markets from as early as the 1950's, with the primary motive being to help market participants optimise their chance to earn higher returns. According to conventional economic theory, the relationship between risk and return is a positive and linear relationship – the higher the risk, the higher the return. However, there are many studies documented in literature which show a positive or negative or no relationship at all. As a result, due to the magnitude of conflicting results over the years, this has caused an international and local debate to arise regarding the risk-return relationship. International studies have explored a number of theories and models to attempt resolving the inconclusive empirical backing of the risk-return relationship. On the other hand, the methods employed by South African studies and the volume of literature on the topic is relatively limited. South Africa is becoming increasingly more recognised, liberalised, interactive and integrated into the international economy. Therefore, this study makes a significant contribution from a South African market perspective. This study identifies volatility feedback, a stronger measure of regular volatility, as an important source of asymmetry to take into account when investigating the risk-return relationship. Given that South Africa is an emerging market which is subject to higher levels of volatility, one would expect the presence of this mechanism to be more pronounced. Thus, this study investigates the risk-return relationship once volatility feedback is taken into account by its magnitude in the South African market. A valuable contribution of this study is the introduction of the novel concept “asymmetric returns exposure” which refers to the risk that arises from the asymmetric nature of returns. This measure has a certain level of uncertainty attached to it due to its latent and stochastic nature. As a result, it may be ineffectively accounted for by existing parametric methods such as regression analysis and GARCH type models which are prone to model misspecification. The results of this study are presented according to the robustness of the approaches in the build up to the final result. First, the GARCH approach is employed and consists of a symmetric and asymmetric GARCH type models. The GARCH approach is treated as a preliminary test to investigate the presence of risk-return relationship and volatility feedback, respectively. While the GARCH type models have the ability to take into account the volatile nature of returns, asymmetries and nonlinearities remain uncaptured by the probability distributions governing the model innovations. Thus, the results of the GARCH type models are inconsistent and not statistically sound. This motivates the use of a more robust method, namely, the Bayesian approach which consists of a parametric and nonparametric Bayesian model. The Bayesian approach has the ability to average out sources of uncertainty and measurement errors and thus effectively account for “asymmetric returns exposure”. The test results of both the parametric and nonparametric Bayesian model find that volatility feedback has an insignificant effect in the South African market. Consequently, the risk-return relationship is estimated free from empirical distortions that result from volatility feedback. The result of the parametric Bayesian model is a positive and linear relationship, in line with traditional theoretical expectations. However, it is noteworthy that in the context of this study that the nonparametric approach is highlighted over the parametric approach. The nonparametric approach has the ability to adjust for model misspecifications and effectively account for stochastic, asymmetric and latent properties. It has the ability to take into account an infinite number of higher moment asymmetric forms of the risk-return relationship. Thus, the nonparametric Bayesian model estimates the actual fundamental nature of the data free from any predetermined assumptions or bias. According to the nonparametric Bayesian model, the final result of this study is no relationship between risk and return, in line with early South African studies.
Value relevance of financial statements of non-financial firms listed on the Johannesburg Stock Exchange.
(2020) Sixpence, Atanas.; Adeyeye, Olufemi Patrick.; Rajaram, Rajendra.
The year 2010 marks a full calendar year after the 2007-2009 global financial crisis (GFC). The GFC was characterised by huge losses across all equity indices on the Johannesburg Stock Exchange (JSE). The losses were not entirely commensurate with the operating performance of listed companies, as reported in their financial statements. While general negative sentiment associated with the GFC was a major driver of the mismatch between firm performance and share price movements on the JSE during the GFC, continued mismatches witnessed in the post-crisis period (2010-2017) raise questions regarding the usefulness of financial statements in explaining share price movements. This research examines value relevance of tangible book value, EBIT from continuing operations, firm size, financial risk, cash dividends, and retained earnings, using a dynamic panel dataset. The population comprises of all non-financial firms listed on the JSE that were active for the entire 2010 to 2017 study period, excluding new listings and de-listings during the period. Purposive sampling from all eligible industry sectors of the JSE was used, where the number selected from each industry was based on the total number of eligible firms in that industry, the population size and the sample size. Based on a population size of 200 firms, 50 were sampled for this research. Value relevance was determined by statistical significance of each financial statement variable, where lack of statistical significance means a variable is not value relevant. Two-step System Generalised Method of Moments (System GMM) was used in this study’s regressions. The dependent variables are firm value and share prices, where firm value is measured by market capitalisation, enterprise value and Tobin’s Q. EBIT was found to be value relevant regardless of the measure of firm value used while, on the other hand, book value is not value relevant. Firm size was found to have no significant effect on share price movements. Influence of a small firm’s discount on share prices of small companies is one of the original contributions of this study. Total debt and debt/equity ratio are the two measures of financial risk used and the debt ratio was found to be value relevant regardless of a firm’s risk category. Value relevance of total debt is contingent upon a firm’s risk category, leading to a high debt illusion, which is another original contribution of this study. Cash dividends and retained earnings were found to have no impact on firm value, which was measured by market capitalisation and Tobin’s Q. Findings in this study inform the decisions of company executives, equity investors, investment analysts, accounting standards setters, and other policy makers.
Significance of infrastructure investments in emerging markets to institutional investors.
(2020) Magweva, Rabson.; Sibanda, Mabutho.
The worldwide financial crisis of 2007/8 and the subsequent economic slump led to significant funding and solvency challenges for institutional investors as their financial positions were adversely affected. The former institutional investors’ investment ‘safe haven’, being real property/estate, was one of the catalysts for the 2007/8 crisis as the real estate market experienced substantial losses. These experiences altered institutional investors’ perceptions towards their traditional asset and portfolio allocation strategies. In an attempt to avoid poor returns and excessive volatility from real estate, bonds and money market instruments, institutional investors are now in a new drive to diversify and supplement their core assets. As a result, institutional (and individual) investors are on the hunt for better yields, diversified portfolios, and inflation hedged returns so that they can meet their long term inflation-indexed liabilities and remain afloat. Infrastructure sector investments, given their theoretical narratives and attractive investment characteristics qualify to be the new investment niche and appropriate for long term institutional investors. This claim to the attractiveness of infrastructure investments can be rejected or shelved if empirical analysis of infrastructure investment features yields contrary results as the attractive risk-return profile of infrastructure investments might be ‘illusory’. The illusion is amplified by the differences in infrastructure investments in developing and developed markets. This thesis evaluated the economic or financial intrinsic infrastructure investment features to ascertain if institutional investors (in their hunt for new investment avenues), can derive value from the same in emerging markets where the infrastructure gap is high and the infrastructure market still developing. Academic studies on infrastructure investments in emerging and developed markets are scant. The few available academic studies applied very basic statistical measures on the subject matter. The present study adopted, portfolio optimization approach, risk-adjusted return measures, linear and non-linear autoregressive distributed lag (ARDL) models, panel ARDL as well as EGARCH and GJR-GARCH models to achieve the set objectives. As such, the study makes notable contributions to the body of knowledge by applying appropriate econometric models using emerging nations as a case. The results indicated that unlisted or private infrastructure securities can amplify portfolio returns and dampen portfolio risk. The significance of infrastructure investment to institutional investors is thus limited to enhancing portfolio returns and reducing portfolio risk. The results showed that listed or exchange traded infrastructure’s risk-return profile is similar to that of real property and general emerging equity market returns in emerging markets. Private and listed infrastructure exhibited different stochastic and distributional features implying that they can play a complementary role in a portfolio. This implies that investors can hold listed and private infrastructure in the same portfolio without sacrificing portfolio performance. Listed infrastructure exhibited remote inflation hedging ability on short term basis. All other assets are poor inflation hedges in emerging markets implying that investors must consider other assets which can hedge inflation risk. All the assets under consideration exhibited significant volatility clustering, volatility persistence and leverage effects. GJR-GARCH specification under GED proved to be the optimal volatility model for all assets under study. This implies that corporates in the infrastructure sector (as well as real property and general equity) in developing economies should be prepared to absorb an additional risk premium as lenders are exposed to significant volatility persistence. On the same note, investors should also come up with other sources of liquidity as volatility persistence will increase the cost of providing liquidity in emerging markets. Investors are recommended to allocate a significant part of their capital to unlisted infrastructure so that they can enhance their portfolio performance and reduce portfolio diversifiable risk. In order to hedge inflation risk, investors are recommended to look beyond infrastructure, real property and the general equity market in emerging markets. Policy makers in emerging companies are recommended to design contracts and concessions which link returns from long term infrastructure returns to inflation rate. On the same note, regulators in emerging financial markets are recommended to come up with policies which dampen the volatility of asset prices which in turn restore investor confidence, thereby attracting long term capital. Investors are encouraged to consider leverage effects when computing their value-at-risk figures and when making investing decisions. Researchers are encouraged to unbundle the infrastructure sector, and emerging markets ‘groups’ when making future studies. On the same note, as data become available and the economic environment changes, inflation hedging capabilities of the assets covered in this study can be evaluated on a longer term basis in different inflation environments.
The impact of foreign ownership on firm performance: evidence from South Africa.
(2020) Naidu, Delane Deborah.; Charteris, Ailie Heather.; Moores-Pitt, Peter Brian Denton.
The inflow of Foreign Direct Investment (FDI) is an important source of finance for South Africa. The South African government continuously attempts to attract more FDI to improve economic growth. Several studies have examined the determinants and effects of FDI at a macroeconomic level in South Africa, but very little research has analysed the effects of FDI at a microeconomic level, where the focus is on firm performance. Foreign ownership sourced from FDI can have both direct and spillover (indirect) effects on firm performance. The absence of evidence regarding the effect of foreign ownership on firm performance raises questions about the impact of FDI at the firm-level in South Africa. Hence, this study seeks to determine the direct and horizontal spillover effects of foreign ownership on the financial performance of firms listed on the Johannesburg Stock Exchange (JSE). This study uses panel data for non-financial firms listed on the JSE, covering the seven-year period from 2012 to 2018. The system Generalized Method of Moments (GMM) approach is employed to estimate the relationship as it accounts for endogeneity, simultaneity and unobserved heterogeneity, thus ensuring unbiased results. Firm performance is measured with Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q. The results for the direct effects vary across performance measures, with a non-linear effect of foreign ownership identified only when ROE is used. The findings show that foreign ownership has a positive effect on ROE at levels of foreign ownership below 40.1% but a negative effect at higher levels of foreign ownership. No evidence of horizontal spillovers are found for any performance measures. The implications of these findings are discussed along with recommendations for future research.
Effect of macroeconomic variables on stock returns under changing market conditions: evidence from the JSE sectors.
(2020) Moodley, Fabian.; Nzimande, Ntokozo Patrick.; Muzindutsi, Paul-Francois.
The equity market is seen as one of the key determinants of the fraternity of finance, as it unites investors with ambitions to invest in marketable instruments to earn a return on their investments. The equity market not only unites investors with similar ambitions, but is an important economic stimulus because it contributes a significant portion to economic growth. Underlying financial theories illustrate an interaction between stock market returns and macroeconomic variables. However, recently a debate has arisen in relation to the type of effect that is evident between macroeconomic variables and stock market returns. This debate is centred on the efficient market hypothesis (EMH), which depicts a linear effect and the adaptive market hypothesis (AMH), which advocates for a nonlinear affect. Thus, there is no empirical agreement regarding the relationship between macroeconomic variables and stock market returns. In an attempt to contribute to the debate, the study examined the interaction between macroeconomic variables and the Johannesburg Stock Exchange (JSE) indices returns under changing market conditions. The study’s objective was to establish the effect between macroeconomic variables and stock market returns in a bullish and a bearish market condition and to compare the expected duration of each market condition among the selected JSE index returns. The study used the Markov regime-switching model of conditional mean with constant transition probabilities. Moreover, preliminary tests in the form of graphical visualisations, descriptive statistics, correlation tests, unit root tests and stationarity tests with and without structural breaks were considered. The variables that formed part of the JSE consisted of the real values associated with the JSE All-Share Index, Industrial Metals and Mining Index, Consumer Goods 3000 Index, Consumer Services 5000 Index, Telecommunications 6000 Index, Financials 8000 Index and the Technologies 9000 Index. The macroeconomic variables included the real values of inflation (CPI) rate, industrial production rate, short-term interest rate, long-term interest rate, money supply (M2) and real effective exchange rate (REER). The JSE index returns series and the macroeconomic variable series contained monthly data that ranged from January 1996 to December 2018. The findings of the regressed model illustrated the JSE All-Share Index returns are negatively affected by long-term interest growth rate in a bull market condition, by short-term interest growth rate in a bear market condition, and positively affected by industrial production growth rate in a bear market condition. The Industrial Metal and Mining Index returns are negatively affected by inflation growth rate in the bear market condition. The Consumable Goods Index returns are positively influenced by growth rate of real effective exchange rate in a bullish market condition, negatively affected by inflation growth rate, short-term interest growth rate and growth rate of REER in a bear market condition. The Consumable Service Index returns are negatively affected by short-term interest growth rate in a bull market condition and long-term interest growth rate in a bear market condition. The Telecommunication Index returns are negatively affected by long-term interest growth rate in the bull and bear market conditions and positively affected by growth rate of REER in a bear market condition. The Financial Index returns are negatively affected by long-term interest growth rate in a bull and bear market and short-term interest growth rate in a bear market condition. The Technologies Index returns are positively affected by growth rate of REER in a bull market condition. Moreover, the bull market condition prevailed the longest across the JSE selected indices. The findings of this study are consistent with AMH as it suggests that the efficiency and inefficiency of equity markets are owing to changing market conditions. Hence, macroeconomic variables affect the stock market returns differently under changing market conditions. Moreover, the findings were seen to contradict EMH as it suggests equity markets are efficient. As a result, the alternating efficiency effect under changing market conditions suggests that the effect of macroeconomic variables on stock market returns is explained by AMH and could be better modelled by nonlinear models. Thus, policymakers should consider that the effect of macroeconomic variables on JSE index returns varies with regimes and, therefore, develop appropriate policies.
The impact of exchange traded funds on the microstructure of their constituent shares: a South African case.
(2020) Peerbhai, Faeezah.; Muzindutsi, Paul-Francois.
The creation of the Exchange Traded Fund (ETF) has revolutionised the global asset management industry since its inception three decades ago, with the result that this investment product has propelled passively managed products to the forefront of the financial market. Whilst the superficial benefits and costs to this product are often debated, the potential impact of these investment assets on the microstructure elements of the financial market, and thus its overall impact on market stability, is less well known. The necessity for a greater understanding of the potential positive or detrimental impacts of this asset class on market operation has been the driving force in recent international developments in this field. This study therefore aims to fill this gap in the literature, by evaluating the impact of ETF-related market activities, on the microstructure elements of information efficiency, and liquidity of the South African equity market. The analysis of liquidity aims to evaluate the influence of ETF introduction on the relative liquidity of its underlying assets. The sample therefore consists of 147 JSE-listed firms which are the constituents to the 23 JSE-listed, domestic equity ETFs that were listed between 2006 and 2019. In contrast, the informational efficiency analysis attempted to examine the impact of ETF ownership and trade, on the efficiency of its underlying constituents, and this analysis therefore makes use of 94 underlying JSE-listed firms, which are included in a sample of both domestic and international ETF between the periods of 2009 to 2019. The research methods made use of the event study approach, fixed effect panel data estimations, and the Generalised Method of Moments (GMM) estimation method. The results produced largely find support for Merton’s (1987) hypothesis, that the inclusion of a company into the ETF, increases investor awareness, which thus facilitates further informed trading in the underlying asset. This is evidenced by findings of improved liquidity and information efficiency in the underlying constituents to the ETFs surveyed, with the smaller, less well-known companies in the analysis enjoying the benefits of ETF membership more. The study therefore concludes that the evidence of improved market function and stability due to ETFs, is beneficial for investors who usually face adverse portfolio effects due to the high concentration of large firms on the JSE. Therefore regulators should actively encourage growth in this market by relaxing current pension fund regulations, and revising the taxation environment for ETFs to allow this asset class to become more competitive relative to the actively managed fund industry in South Africa. Keywords: Exchange Traded Funds, South Africa, liquidity, information efficiency, synchronicity, JSE.
Firm size and the day of the week effect on the Johannesburg Stock Exchange.
(2020) Mutemeri, Linah.; McCullough, Kerry-Ann Frances.
The Efficient Market Hypothesis (EMH) asserts that stock prices always entirely reflect all available information and that stock prices follow a random walk, where future stock prices are not predictable based on historical prices (implying stock market efficiency). If the stock market is not efficient, abnormal returns can be realised by beating the stock market through observing and trading on certain patterns (anomalies) exhibited by past stock prices. Various anomalies have been documented, including the Day of the Week (DOW) effect (the tendency of a stock market to exhibit on average low daily returns in the beginning of the week (mostly on Mondays) and high returns towards the end of the week (mostly on Fridays). Examining the DOW effect is particularly interesting, as it demonstrates daily patterns on which investors can take advantage of this anomaly to realise excess returns on daily basis. One of the reasons that has been put forward as to what initiates the DOW effect, is measurement error as when a variable of interest either explanatory or dependent variable has some measurement error independent of its value. Thereby, leading to the notion that the DOW effect is present in medium and small markets or firms with low merchantability (firm size effect). However, from the South African literature, still has a gap about the existence of the DOW effect across firm sizes on the JSE and its cyclical (appearing or disappearing) changes over time. Firstly, the study examined the existence of the DOW effect on the JSE in firm sizes on a full sample (1995 to 2019) utilising daily log-returns. The best-fit models were selected from a family of GARCH models, EGARCH (2, 1) and EGARCH (3, 1) models better fitted the AltX and the large index respectively and TGARCH (3, 1) and TGARCH (1, 1) better fitted medium and small indices respectively. The results showed that the DOW effect exists on the JSE stock exchange in three out of all the four investigated indices (medium, small and AltX except the large), particularly the DOW effect existed more in returns than in the volatility of those returns. Secondly, a rolling window analysis was utilised to examine the changes of the DOW effect over 1995- 2019 where the best-fit model for each sub-period was utilised. The results showed that the existence of the DOW effect is not constant over time concluding a cyclical behaviour (appearing and disappearing in some sub-periods). However, the highest frequency of appearance of the DOW effect appeared in the medium, small and the AltX indices confirming the notion that the DOW anomaly is mostly found in companies with low capitalisation.
Modelling export growth in South Africa with a focus on third-country effects and stock market liquidity.
(2020) Tsunga, Kudzanai Richard.; McCullough, Kerry-Ann Frances.; Moores-Pitt, Peter Brian Denton.
After considering the potential benefits of exports in ameliorating lacklustre economic growth, this thesis analyses South Africa’s exports to the world and to its trading partners. It notes that gaps in erstwhile studies on export behaviour were attributable to linear modelling, overlooking the role of the financial economy, and an overreliance on exchange rate volatility as an explanatory variable, which in part, resulted in the exchange disconnect puzzle. The gaps are addressed by employing non-linear models, consideration of financial economic variables, and third-country effects which collectively addressed the summary objective of establishing the existence of shortrun and long-run linear and asymmetric relationships of South Africa’s exports with real and financial economic variables. A unique exports dataset obtained from the South African Revenue Services (SARS), is used to undertake multivariate time-series and cross-sectional analysis beginning with the linear autoregressive distributed lag model (ARDL) and the pooled mean group (PMG) before progressing to consider non-linearity with the non-linear ARDL (NARDL), the quantile ARDL (QARDL), the Markov-switching model, the threshold autoregressive (TAR) model and the panel threshold model. The analysis is conducted in cognisance with the endogenous growth theory and the finance-led growth hypothesis which propose an interdependence between the real and financial economies. This thesis finds that stock market illiquidity and volatility possess both a linear and asymmetric negative relationship with exports in the short-run and long-run. Further, exports were consistently weaker at higher thresholds of the financial economic variables. Exchange rate relationships and third-country effects are not consistently significant; confirming the exchange disconnect puzzle. This thesis concludes that non-linear models and the financial economy must be considered when analysing South African export demand because they provide a nuanced analysis of export behaviour. The findings imply that future research in the subject area must consider the financial economy. In addition, policy makers should incentivise ease of capital flows to export growth projects because investors react to changing risk and liquidity costs induced by diminishing exports. This thesis recommends the accommodation of financial market stability and liquidity within the scope of South Africa’s trade policy to attain sustained exports contribution towards economic growth.
Influence of the performance of Black Economic Empowerment shares on the Johannesburg Stock Exchange Top 40.
(2020) Hargreaves, Megan Kate.; Sibanda, Mabutho.
The study investigated the performance of Black Economic Empowerment (BEE) shares on the Johannesburg Stock Exchange (JSE). It employed data from 48 firms active on the JSE from 2003 to 2016. Unbalanced panel data was used as there were firms with no data for this period and they were omitted from the study when they were no longer part of the JSE Top 40. The fixed effects model results showed that BEE shares’ influence on share returns is insignificant, but that they do have an impact on firm value. It was found that when a BEE share is issued, the firm’s value increases by 0.522 when return on equity (ROE) is used and 0.45 when return on assets (ROA) is employed. A bootstrap technique was run on the fixed effects model in order to account for cross-sectional dependency. The bootstrap did not affect the outcome of the effect of BEE shares on share returns. However, the influence of BEE shares on the firm’s value became significant. These results are consistent with the existing literature which states that firms issue BEE shares in order to reap other benefits. Although BEE shares have no influence on share returns and firm value, it is recommended that firms continue to issue such shares in order to receive a higher BEE rating.

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