Capital flow volatility, bank roe and equity market return in Sanek countries.

Abstract

This thesis focuses on the volatility in cross-border capital flows, bank RoE, and equity market returns (EMR) in South Africa, Nigeria, Egypt, and Kenya (SANEK), using quarterly data from 2000 to 2021. Cross-border capital flow volatility has been decomposed into bank lending and equity flows. The volatile nature of capital flows and significant variations in equity returns and bank RoE instability in these countries raise concerns about financial system stability. This thesis is divided into three interconnected essays, each with its own distinct focus. The first essay examines the determinants and magnitude of volatility in crossborder bank lending and equity flows using a Markov switching mean VAR model. It identifies global factors such as contagion effects, world GDP, and world interest rates as key "push" drivers, while domestic factors like institutional quality, financial openness, inflation, GDP growth, and current account balance serve as "pull" factors. These influences vary by country and regime. For example, in South Africa, push factors predominantly drive bank lending volatility, while equity flows are shaped by both push and pull dynamics. Nigeria and Egypt experience strong impacts from push factors across both capital flow types, whereas in Kenya, both factor sets significantly influence flow volatility. The findings underscore the need for targeted policy responses to stabilise capital flows. The second essay analyses the impact of cross-border bank lending volatility on bank RoE using GARCH, EGARCH, and TGARCH models. Results reveal that lending volatility affects RoE asymmetrically across countries. In South Africa and Egypt, positive volatility shocks enhance bank RoE, while in Nigeria and Kenya, negative shocks diminish it. These outcomes highlight the importance of risk management strategies tailored to each country’s financial environment. Regulators must also account for these dynamics when crafting supervisory policies to ensure banking sector stability. The third essay explores the asymmetric effects of equity flow volatility on EMR using the NARDL model. It finds that positive shocks significantly boost returns in Egypt but suppress them in Kenya, while in Nigeria, negative shocks unexpectedly improve equity returns. In South Africa, positive shocks exert a strong influence on University of KwaZulu-Natal https://researchspace.ukzn.ac.za © Pamba, D., University of KwaZulu-Natal, 2025 EMR. These diverse reactions suggest that investors and policymakers must adopt country-specific strategies to manage risk and optimise returns in volatile capital markets.