Masters Degrees (Finance)

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The effect of economic uncertainty on exchange traded fund performance and volatility in South Africa.
(2024) Rajhununan , Swastika.; Peerbhai , Faeezah.; Muzindutsi , Paul-Francois.
Global economic uncertainty (EU) is at unprecedented levels due to technological advancements, globalization, political divisions, and growing government intervention. Economic Policy Uncertainty (EPU) exacerbates this by creating ambiguity about future outcomes, leading to cautious investment, increased volatility, and difficulties in decisionmaking. This uncertainty also weakens investor confidence and complicates risk management, with emotional factors during crises further influencing decisions and expectations, making accurate forecasting even harder for both investors and firms. Given the rapid growth in the popularity of exchange-traded funds (ETFs), this study investigates the effect of EU on ETF returns under both bullish and bearish market conditions in South Africa, while also assessing how EU influences ETF volatility. Specifically, the research examines bond and equity ETFs over the period from 2006 to 2023. The sample consists of 40 ETFs, categorized into four distinct portfolios of bond and equity ETFs tracking domestic benchmarks, and bond and equity ETFs tracking international benchmarks. EU is proxied using the Rand Merchant Bank (RMB) Bureau of Economic Research (BER) Business Confidence Index (BCI). The Markov Switching Regime (MSM) model is used to capture the effect of EU on ETF returns under varying market conditions, utilizing monthly data. In addition, Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models are used to examine the relationship between EU and ETF return volatility. The MSM results indicate that EU has a statistically significant positive effect on equity ETF returns under bullish market conditions, reflecting investor optimism in perceived recovery phases. However, this effect diminishes in bearish market conditions. The international equity ETFs portfolio did not exhibit a significant relationship with EU, reinforcing the view that global diversification helps mitigate South African-specific risks. For bond ETFs, a “flight to safety” phenomenon is observed, consistent with global patterns during periods of heightened uncertainty. The GARCH analysis reveals limited evidence that EU significantly influences ETF volatility across any of the portfolios. This research highlights the importance of behavioural finance in shaping market reactions during periods of heightened EU. The observed asymmetry in market responses to EU under different market conditions presents an opportunity for investors to exploit these differences for potential diversification benefits. The study encourages further exploration of ETF performance, particularly in emerging markets, to expand the existing body of literature on the topic. Additionally, future research should focus on addressing the current limitations and leveraging more sophisticated data and methodologies. By doing so, studies can uncover deeper insights into the behavioural and systemic drivers of ETF performance, especially in the context of EPU, helping to advance our understanding of these investment vehicles in complex financial landscapes.
The tracking performance of equity exchange traded funds: a consideration of fund replication strategy, fund domicile and crisis period.
(2024) Naidoo, Prianca.; Mccullough, Kerry-Ann Frances.
An Exchange Traded Fund (ETF) is an investment vehicle that issues securities that are essentially claims on an underlying pool of assets. Tracking error measures, the ability of traditional passive ETFs to replicate the returns of their respective underlying index accurately. This measure is commonly reported for all funds with a mandate to replicate some benchmark index. Despite the primarily passive nature of ETFs, fund managers can apply active investment management techniques to them. The application of active management to these funds may include the respective index holding an actively selected basket of securities or entering derivative contracts that deliver the performance of an index, or some mixture of the two. The importance of looking at the passive and active characteristics of funds corresponds to the replication strategies followed by ETFs. Here replication refers to the concept of mirroring the returns of a benchmark index with the returns of an ETF. Bloomberg Professional’s categorisation of replication strategies shows that ETFs replicate their benchmark indices using the following strategies: full physical, stratified sampling, optimization, synthetic and leveraged replication. This study analyses the tracking performance of 52 equity-backed ETFs, focusing on replication strategies, fund domicile, and crisis period. Four methods of tracking error estimation are applied to the ETF sample which have an inception date before 1 January 2006 or 1 January 2012 for the fund replication and domicile analyses due to the observed lack of ETFs following certain replication strategies and domiciled in emerging markets with an inception before 2006. For the crisis analysis the research period spans 18 years to account for the documented price impacts the 2008/2009 Global Financial Crisis (GFC) and the COVID-19 pandemic had on various indices and their replicating funds. We find that overall partial physically replicated ETFs provide superior tracking performance. Full physically replicated ETFs exhibit the highest level of tracking error. Synthetic ETFs demonstrate superior tracking performance in comparison to full physical ETFs. Considering the same underlying benchmark index, leveraged ETFs with lower leverage multipliers exhibit lower levels of tracking errors than their counterparts. ETFs domiciled in developed markets limit tracking errors to a greater extent than emerging market ETFs and synthetic ETFs show superior tracking performance when tracking emerging market indices. All fund replication strategies (noting that leveraged ETFs are excluded in this section of the analysis) for both emerging and developed market ETFs show increases in tracking error during the GFC and the COVID-19 pandemic. Optimized ETFs exhibited the highest increase in tracking error during the GFC while full physically replicated ETFs exhibited the highest increase during the pandemic. Synthetic ETFs showed the most resilience to the effects of the pandemic. Emerging ETFs exhibited higher increases in tracking error during both crises in comparison to those in developed markets. This study provides both institutional and individual investors with valuable knowledge on the consideration of fund replication strategy, fund domicile and the performance effects of documented crisis periods when selecting an appropriate ETF. Investors and portfolio managers are provided with relevant insights on which type of ETF replication to follow in countries with different development levels and during volatile market periods. Partial physical replication provides superior tracking performance when focusing solely on replication strategy. Synthetic ETFs are recommended when investing in emerging market indices and aiming to minimize exposure to volatile markets marked by crises.
Funding strategies for small business sustainability in eThekwini Municipality.
(2024) Ngcobo , Nkanyiso Thandizwe.; Gregory , Vanessa Margaret.
Like other developing countries, South Africa faces diverse socioeconomic challenges, such as high unemployment, skills shortages, and poverty. Various researchers have identified the creation and sustainability of small businesses as the most effective long-term solution to these issues and low economic growth. Despite their crucial role in the economy, data shows that 50% of small businesses in South Africa close within 24 months of starting, and between 70% and 80% of those that survive the initial period fail within their first five years. The situation is similar in KwaZulu- Natal, with a reported 71% failure rate for SMEs within the first 24 months as of 2020. This study aimed to identify financial strategies that new SMEs can adopt to achieve sustainability during their first five years. A qualitative multiple case study design was used, employing semi-structured interviews for data collection. The findings revealed that most SMEs heavily rely on internal financing, as it is the most cost-effective option available. Additionally, internal sources of capital are the only funding sources available to them in the first years since banks perceive new SMEs as highly risky clients and equity is not popular among the new SMEs community. For equity, SMEs must be willing to compromise a share of their business along with a certain level of control to an external entity; for most SME owners, this is too expensive even to consider. The study observed a knowledge gap in the SME community regarding other forms of funding, such as angel investors, venture capital, and strategic investors and mostly focused their attention to internal funding. Findings realised the need for substantial support from capital providers such as banks and the government to educate infant SMEs on good practices that might improve their probability of survival and sustainability. This study suggests further exploration into the high failure rate of SMEs beyond financial constraints, considering other contributing factors. The findings can benefit new small business owners, government and financial institutions supporting SMEs, and policymakers responsible for creating regulations that promote SME sustainability.
Dynamic connectedness, hedging effectiveness and investor sentiment among South African sector indices.
(2024) Nkosi , Thabile Siphesihle.; Muguto , Hilary Tinotenda.; Nhlapo , Rethabile Nokulunga.
Over the past two decades, the interconnectedness of markets has surged, intensifying the imperative to understand risk transmission in cross-market portfolios. Similar trends have been seen across different sectors within the same markets. Amidst a myriad of catalysts, investor sentiment has emerged as the most influential force in propelling this connectedness. This study assessed South African sector connectedness, hedging effectiveness, and susceptibility to investor sentiment using a proxy-based composite sentiment index from July 2009 to December 2022. The ADCC-GARCH model, the Diebold and Yilmaz (2015) spillover index and the t-copulas extension were used to gauge dynamic connectedness and hedging effectiveness among sector indices, contingent on prevailing market-wide investor sentiment. The findings show that dynamic connectedness varies among sector indices in the South African market. During financial turbulence, the interconnectedness intensifies due to heightened volatility, resulting in significant spillovers. The financial and industrial sectors were net transmitters, whereas the rest were the net recipients of risk. The consumer services sector had the highest hedging effectiveness when paired with other sector indices. The inclusion of sentiment improved the measurement of dynamic connectedness and hedging effectiveness, as sentiment-augmented models were statistically more robust. This indicates that sentiment significantly influences the dynamic connectedness and hedging effectiveness among indices in the South African market. This study's novelty lies in creating a composite sentiment index specifically designed for the South African market. Further, this study focused on individual sectors rather than broad markets, offering a more granular analysis. Its findings provide valuable insights to investors, portfolio managers, and policymakers, enhancing their understanding of the sectors' intricate dependencies and vulnerability to sentiment. This enables the implementation of optimum diversification, risk management and portfolio optimisation strategies. Through the creation of an investor sentiment measure, an examination of sector-level interconnections, and consideration of the distinctive attributes of the South African market, this study delivers significant insights for both market participants and researchers. The findings have implications for investors, firms and policymakers. They reveal that sectoral return volatility often persists due to irrational trading behaviours, emphasising the need for policymakers to implement regulatory measures to manage volatility shocks effectively. Investors and firms can use these insights to optimise portfolio strategies and improve risk management. Increased volatility connections during economic downturns highlight the importance of understanding how different sector indices react to external shocks for assessing portfolio risks. For policymakers, the findings offer insights into financial risk distribution, information efficiency, and market stability, aiding in the preventing of sector contagion and stabilising financial systems. Firms should consider how capital dynamics are influenced by volatility and factor in sentiment when making investment decisions.
COVID-19’s impact on the JSE-listed industry prices.
(2024) Naidoo , Mayuri.; Obagbuwa , Oloyede.; Rajaram , Rajendra.
This study aimed to examine the impact of the COVID-19 pandemic on the stock prices of companies listed on the Johannesburg Stock Exchange (JSE). Additionally, the study aimed to evaluate the market efficiency within select industries listed on the JSE, employing the Efficient Market Hypothesis (EMH) theory. The examination study focused on the period immediately following the announcement of lockdown measures, spanning 30 days. The fixed effect model was used to evaluate the relationship between JSE industry returns and independent variables such as COVID-19 metrics, Adjusted Share Price, and Exchange Rate over time. Further, the event study methodology was used to measure the abnormal returns on stock prices 30 days up to 30 days after the lockdown announcement and hence the efficiency of the stock market during this time. Notably, the regression analysis underscored that while the exchange rate may not wield significant influence over financial returns, the number of COVID-19 cases appears to have a statistically significant positive impact on stock prices, emphasising the pervasive influence of the pandemic on market dynamics. The event study revealed that 62.5% of the selected JSE industries exhibited support for the Efficient Market Hypothesis (EMH) theory. This suggests that a significant portion of the South African stock market demonstrates strong information efficiency. The findings suggest the importance of monitoring how the outbreak of pandemics has affected the general economy and the environment in which companies operate. Investors should be cautious during this time as there are additional risk factors such as national governments enforcing lockdown restrictions which will limit company activities. Further, the study reveals that investors who are investing in the South African stock exchange should use investment strategies that are aligned with investing in weak-form efficient markets.
The impact of COVID-19 on the South African stock market: a sectoral-level analysis.
(2024) Ramterath, Akshay Saish.; Peerbhai, Faeezah.
The novel 2019 Coronavirus (COVID-19) quickly spread all over the world. It dramatically affected the financial markets in almost every country, creating substantial uncertainty permeating every aspect of life and business. Investors and markets are facing a high degree of volatility regarding the physical and financial impacts of the virus. Behavioural Finance studies are steadily emerging, highlighting the impact of investors' emotions on their investment decisions in stock markets during macroeconomic events. Existing research of the pandemics impact on volatility and/or stock returns have predominantly focused on the overall performance of the South African stock market with limited evidence on the industry specific impact. This study therefore aims to analyse the impact of COVID-19 on the 8 largest industry sectors of the Johannesburg Stock Exchange (JSE). In particular, the study attempts to evaluate the impact of COVID-19 on industry performance, stock returns, trading volume, stock volatility and COVID-related investor sentiment. These research objectives are analysed using a variety of different methodologies, such as an event study, and GARCH (1,1) model. With existing global studies indicating a rise in the importance of industry specific factors which aid in the pricing of equities, a study of this sort is imperative to the South African investor. The sample in this study consists of daily data from the 8 largest sectors on the JSE and spans the period 1 January 2017 – 30 August 2022. The selected period ensured to include stock market performance before the COVID-19 outbreak, allowing a more accurate comparison of industry performance. The results of this study suggest that the COVID-19 pandemic had a significant impact on all sectors of the JSE included in this paper, both in the short-term and long-term. Some sectors gained from the impact of the pandemic and others suffered - with the number of the sectors negatively impacted outweighing the number of sectors positively impacted. Furthermore, the findings of this study suggest significant implications for investors and policymakers. For investors, it is suggested that they be cognisant of how industry sector idiosyncrasies affect company performance during crises. Investors who seek a healthy return on their investment should avoid investing in sectors that are more vulnerable in times of crisis and negatively impacted by the COVID-19 pandemic. However, risk-seeking investors may opt to invest in higher-risk sectors since these stocks may generate higher returns due to an increased market risk premium. For policymakers, the findings of this study indicate that the implementation of strict lockdowns in times of crisis be carefully implemented as many sectors were not able to recover from the implications brought on by this policy, crippling further operation of many companies. Regulators should be cautious of the effect of such policies on industries and the economy as a whole. Policymakers must customise such policies based on the characteristics or nature of each market sector.
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.
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.
The effect of inclusions and exclusions of stocks from the JSE Top 40 and FTSE/JSE mid cap indices on liquidity.
(2022) Naicker, Milanca.; Peerbhai, Faeezah.
The inclusion and deletions of stock from the equity indices provide an important insight into a company’s performance. There is evidence there are no studies on the effects of inclusions and exclusions of liquidity in a South African market as previous studies in such a market relates to price and index rebalancing effects as a result of inclusions and exclusions to the FTSE/JSE and JSE Top 40. The insights that international studies provide are useful and these effects explored in a South African context would be useful and close the gap in this area of research and this is one of the main aims of the study. The lack of studies analysing the impact on liquidity as a result of inclusions and exclusions to the JSE Top 40 and Mid Cap Index is a disadvantage to South African investors, companies, and regulators. Therefore, the primary objective of this study is to investigate the effect of inclusions and exclusions on the Top 40 and Mid Cap Index on liquidity as well as to determine how does the size of a firm impacts the liquidity effects of an index addition or deletion. The paper seeks to determine these effects by using an event study methodology by regressing a number of different liquidity proxies (turnover, aggregate turnover, bid-ask spread, percentage spread and Amihud Illiquidity measure) using daily data for the companies that have been included and excluded from the indices. This study analyses 44 inclusions and exclusions on the JSE Top 40 and 73 and 81 inclusions and exclusions on the Mid Cap index from January 2010 to December 2020. The results from this study provide important insights into the effects of index revisions and firm size on liquidity. For stocks that form part of the inclusions to an index, there in an increase in liquidity as a result of the increased trade after the stock was included in the Top 40 and provides support from the Downward Sloping Demand Curve Hypothesis, Price Pressure Hypothesis and Liquidity Cost Hypothesis. For exclusions stocks, shows a decrease in volume traded and increasing spreads for the Top 40 and indicates that this diminished liquidity observed for such companies that find themselves excluded in both the Top 40 and Mid Cap indices which supports the information cost liquidity hypothesis.
The effect of disaggregated country risk on the South African equity portfolio returns under changing market conditions.
(2022) Jaffar, Sandisele Ayesha.; Muzindutsi, Paul-Francois.; Habanabakize, Thomas.
Globalization has resulted in the rapid increase of international trade and international mobility of financial capital. Capital inflows into South Africa date back to the early 1990s and these inflows continue to grow. With increased investments into the country, investors can diversify some local risks. Still, they also become exposed to the different components of country risk (political, financial, and economic risk). However, depending on the investor's risk appetite, country risks may encourage or discourage foreign portfolio investments. This study examined the effects of disaggregated country risk on South African equity portfolio returns under changing market conditions. Additionally, this study compared how South African domestic and foreign equity portfolios respond to changes in country risk components under bearish and bullish market conditions. A Markov switching approach was employed to analyse monthly data of 19 equity portfolios for the sample period spanning from January 2000 to December 2019. The results suggested that domestic and foreign portfolios spent more time in downward trends. Moreover, the effects of country risk components depend on market conditions for both domestic and foreign portfolios. In both cases, the impact of country risk components is more significant in bull than in bear market conditions. Essentially, economic and financial risk had a more substantial impact on domestic portfolios, whereas political risk was more significant on foreign portfolios. In this way, political risk cannot be diversified through investing in foreign portfolios. These findings have crucial implications as they indicate that it is vital to maintain a stable economic, financial and political environment to encourage sustainable portfolio investment.
Measuring the impact of Covid-19 on banking sector returns, profitability, and liquidity in South Africa.
(2022) Naidoo, Dashami.; Peerbhai, Faeezah.; Kunjal, Damien.
Abstract available in PDF.
Cryptocurrency volatility, volatility spillovers and the effect of global investor sentiment.
(2021) Rathilal, Sahil.; Muguto, Hilary Tinotenda.; Nhlapo, Rethabile.
Cryptocurrencies continue to enjoy attention from investors and policymakers and their growing usage has fortified this attention. However, it is their volatility and the volatility spillovers among the cryptocurrencies have been most intriguing. Various factors such as susceptibility to speculative pressures, uncertainty regarding their valuation, and the lack of regulation have been forwarded as possible explanations. However, these factors have not fully explained cryptocurrency volatility and volatility spillovers, suggesting that there could be other salient factors. In this study, investor sentiment, described as the noise-driven investors' perception of the risk and cash flows of an asset, was forwarded as one of those salient factors. Specifically, this study sought to examine the nature of volatility and volatility spillovers among currencies and their subjectivity to global investor sentiment. Bitcoin, Ethereum and Ripple and an investor sentiment index constructed from a set of five proxies over a period spanning February 2018 to August 2021 were employed. For the analysis, the study employed GARCH models to examine the nature of cryptocurrency volatility, the ADCC-GARCH framework and the Diebold-Yilmaz spillover index to examine the nature of cryptocurrency volatility spillovers, and the Toda-Yamamoto model to examine the causality between cryptocurrencies and investor sentiment. The study found evidence of significant sentiment effects in both mean and variance equations of the cryptocurrencies. Similarly, the analysis of comovements and spillovers showed that there were significant sentiment effects on the phenomena. Failure to account for investor sentiment could, therefore, lead to poor estimation of volatility and volatility spillovers. The results have implications for investors, speculators, and policymakers alike. The results obtained provided an insight on the effect of investor sentiment on cryptocurrency volatility and showed how the market reacts to the investors' behaviour where their actions influence volatility. The investors and speculators may then use the insight on sentiment to determine the market volatility to earn returns accordingly. Further, policymakers can use this to determine the optimal regulations to prevent excessive volatility in this market. The study, therefore contributes to the debate on the drivers of cryptocurrency volatility. It also contributes to literature by introducing a measure of investor sentiment.
Residential property as a hedge against inflation in South Africa.
(2021) Ramsaran, Nikita.; Moores-Pitt, Peter Brian Denton.
The empirical evidence regarding the magnitude of the relationship between inflation and residential property has had conflicting results. Although the issue of inflation-hedging has been discussed by multiple authors, the results have been inconsistent with regard to the ability of property to act as a hedge against inflation. This topic has been explored largely in an international context, with limited studies on South African grounds. Over the years the topic of inflation-hedging has been examined using multiple cointegration techniques, which have been adapted over the years to accommodate various limitations. The conventional Autoregressive Distributive Lag (ARDL) model has been a solid model for the purpose of this topic as it has proven to have various advantages over other models. However, this model assumes linearity and symmetry with regard to the relationship. In order to overcome the limitations of this model, the Nonlinear Autoregressive Distributive Lag (NARDL) model was developed, as it accounts for possible asymmetric adjustment. Both these models were employed for the purpose of this study with the intent of determining whether the relationship between the variables is nonlinear and asymmetric. This study utilized quarterly data for a 30-year time period from 1989-2019, a period which was extremely relevant in the context of South African history, because of the transition period from the apartheid regime. The data chosen for the inflation rate is represented by the consumer price index (CPI) and housing prices was represented by both the housing price index (HPI), as well as segmented housing prices. The results from this study confirmed that property is able to hedge against inflation, with strong evidence supporting the existence of an asymmetric relationship between the variables. All segments were confirmed to effectively hedge against inflation, with only the affordable segment being a partial hedge for the purpose of the NARDL model. Evidence of asymmetry was confirmed, indicating that when inflation increases, housing prices increase at a rate greater than unity. However, in periods of decreasing inflation, the increase in absolute value is far greater. Investors can, therefore, profit off investing in property during all inflationary periods, and generate greater wealth in periods of decreased inflation.
An analysis of share prices and economic activity in South Africa: an NARDL approach.
(2021) Naidoo, Thiasha.; Moores-Pitt, Peter Brian Denton.
An integral component of economic activity rests on the performance of share prices as it influences consumer and business confidence which in turn affects the performance of the overall economy. The progressive characteristics of share prices and its successive role as an indicator of economic growth has been widely documented in advanced and developing economies such as South Africa but with evidence allowing for nonlinearity and asymmetric movements, being less predominant. The key objective of this thesis is to re-examine an existing issue by using a more complex method of analysis to determine whether fluctuations in the stock market influence the economic growth in South Africa. This study assesses share price fluctuations and its impact on economic growth, with the aim of identifying the nonlinearity and asymmetric effects in the relationship by taking into consideration a primary and sectoral analysis, within a South African context. As such, this study utilised various different methodological techniques that established cointegration; identified the existence of structural breaks; detected long and short-run relationships and determined the effects of nonlinearity and asymmetric adjustments between the stock market and economic activity, covering the period of 1999 to 2019. It was established that the relationship between economic growth and stock prices exhibit evidence of structural breaks. Furthermore, it was concluded that there is a strong link between the stock market and economic activity with the 2007/2008 global financial crisis. Most importantly, this thesis intended to determine the nonlinearity and asymmetric impacts that stock market fluctuations have on economic activity in South Africa. It was exhibited that there is evidence of strong nonlinear cointegration in the relationship. Additionally, there is a strong presence of nonlinearity and asymmetric adjustment in the relationship between stock market fluctuations and economic activity. Therefore, this study concluded that there is strong evidence of nonlinearity and asymmetric adjustment in the cointegrating relationship and depicted that economic growth is sensitive to stock market fluctuations in South Africa, which represents a novel contribution to the literature.
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.
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.
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 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.
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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