Browsing by Author "McCullough, Kerry-Ann Frances."

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An econometric analysis of the equity returns-inflation relationship in South Africa.
(2019) Moores-Pitt, Peter Brian Denton.; McCullough, Kerry-Ann Frances.; Murray, Michael.
Previous empirical evidence regarding the nature and magnitude of the relationship between equity returns and inflation has proven to be conflicting and inconsistent. Although several papers have considered this issue, there is still a lack of consensus as to the nature of the relationship between equity returns and inflation. This represents a considerable point of concern as it is this relationship that acts as an indicator of the historical efficacy of equities as an inflationary hedge. While the classical theory dating back to the 1930’s dictates that equities should function as an effective hedge against inflation because they are based on underlying assets with a fixed real value, a substantial number of studies have obtained results that contradict this theory. Many attempts have been made to explain this phenomenon and to resolve the debate since the 1980’s, notably with the application of cointegration theory andmethods (which were developed in the 90’s). Despite advances in econometrics, the issue remains unresolved on an international scale, with conflicting results still occurring in recent studies (Chaves and Silva, 2018; Bhanja and Dar, 2018; Al-Nassar and Bhatti, 2018). The literature that focuses on the South African case is a typical example of the disparity: relatively modern studies using fairly similar statistical approaches find vastly differing results as to the capacity for equities to act as an inflationary hedge, including findings of positive and negative results (Alagidede and Panagiotidis, 2010; Khumalo, 2013), as well as approaches that failed to produce conclusive results (van Rooyen and Jones, 2018). This thesis aims to resolve the issue for the South African case in order to determine whether or not equities have acted as a historically effective inflationary hedge. The South African economy represents a perfect natural experiment for the study due to its high volatility, especially in terms of macroeconomic indicators such as inflation, over the past thirty-five years. The analysis makes use of the Consumer Price Index (CPI) as a proxy for inflation and the Johannesburg Stock Exchange’s All Share Index (ALSI) as a proxy for equity returns over the period 1980 to 2015. The study is undertaken as a collection of publications that each seek to address particular issues, mostly of an econometric nature, that arise when studying the relationship. The first of these papers deals with the disparity in the South African economy regarding the order of integration of the two variables and seeks to provide a comparative analysis with previous studies. Further, the research contained in paper one seeks to identify possible explanations for the conflicting results in previous studies. The study finds that a significant, positive cointegrating relationship between inflation and equity returns exists in South Africa, at least when using conventional cointegration techniques, implying that equities have exhibited the historical capacity to act as an effective historical hedge against inflation, in contrast to the findings of much of the literature. Further, it resolves previous issues with differing findings as to the orders of integration of the variables, which represents a particularly prevalent problem in studies using South African data. While these initial findings would appear to lend support to the conventional theory that equities are able to act as an effective inflationary hedge in South Africa, when examining the issue more deeply it becomes evident that this finding may potentially be impacted by the inherent assumptions of the models employed. Based on the results of previous studies and the results of the first paper, the second paper posits that the equity- inflation relationship is both time and country dependent, potentially contributing to the aforementioned disparities in the existing literature. The implication of potentially flawed model assumptions is that the results of the first paper may be inaccurate (the model risk of a poor model choice giving unreliable results). As a result of this potential limitations bias, the remaining papers of this doctoral dissertation delve into the assumptions behind the classic model, reflecting more deeply on the nature of the data employed and seeking to determine if this relationship holds when various, arguably more realistic, alternate assumptions are considered. The first of these assumptions that is critiqued is that the relationship is time-invariant, such that the equity-inflation relationship does not exhibit variance over time. In an economy such as South Africa, which has shown exceptional macroeconomic volatility, such an assumption may well be inaccurate and is likely to have reduced the integrity of the conventional tests. Relaxing the assumption of time-invariance allows one to consider that the relationship may have experienced shifts over time as a result of exogenous shocks. This idea is tested by investigating the possibility of structural breaks in the individual time series, as well as in the relationship itself. Structural breaks here refer to an unexpected shift in a time series that can lead to forecasting errors, compromising the reliability of the model. Should a model rely on the assumption of time-invariance it is unable to account for the existence of such structural breaks, leading to compromised results. In the second paper, significant evidence for the existence of structural breaks was found in the case of both variables as well as in the overall relationship. Using the most significant structural break as a breakpoint and investigating the relationship preceding and subsequent to the break pointed to clear evidence that the relationship does change over time. As previous studies have generally assumed the series do not contain breaks, the assumption of time-invariance in previous work may have led to inherently flawed conclusions. However, what this second paper was able to demonstrate, was that even when accounting for breaks, equities maintained their capacity to act as a hedge against inflation in South Africa on either side of that structural break. Further, cointegration testing allowing for structural breaks indicated that the overall relationship was significant and positive and affirmed the prior conclusion that equities are an effective inflationary hedge in the long-run. That is, even when relaxing the assumption of time-invariance and accounting for structural breaks, the overall conclusion for the South African case – that equities are able to perform a hedging function against inflation – remains true. This thesis then continues by developing on this idea of addressing the previous assumptions that may affect this type of analysis, building towards a final, more robust, conclusion. Two additional assumptions remain which require consideration. In recent literature the question of asymmetric adjustment has arisen, including in the analysis of the relationship between equity returns and inflation. Such studies have aimed to deal with the idea that there is no compelling reason to assume that adjustments of the relationship between equity returns and inflation have necessarily been symmetric. Further, it is possible that the relationship may have been subject to a threshold effect, where it exhibits different characteristics depending on whether stocks are underpriced or overpriced relative to goods. It was shown that the adjustment coefficients differ substantially depending on whether they are above or below a certain threshold, and thus that the assumption of linear adjustment is flawed as the relationship exhibits asymmetric adjustment in reality. Further testing for asymmetric adjustment and allowing for such adjustments in the relationship led to the conclusion that the relationship has experienced asymmetric adjustment over the sample period and that the relationship between equity returns and inflation is more appropriately modelled using threshold cointegration techniques. Such findings drastically improve our understanding of the dynamics of the equity returns-inflation relationship and emphasize the importance of accounting for these factors in similar studies. The weakness in previous cointegration testing is somewhat exposed by the strength of the evidence of asymmetric adjustment and effectively questions the findings of the majority of the previous literature which has relied on these techniques. The model far more accurately estimates the relationship between equity returns and inflation and provides new evidence that it experiences a measure of variance around an endogenously determined threshold. Due to the relative power of the model as well as the fact that it has accounted for these factors it can be stated with far greater certainty that South African equities are able to provide an effective hedge against domestic inflation. The evidence of threshold effects is of importance to investors and policy makers, as it is at this point that the adjustment coefficients will vary in terms of their response to exogenous shocks. This is particularly important in the context of this thesis because of the evidence of multiple structural breaks in the cointegrating relationship (found in the second publication) indicating that the relationship has been affected by exogenous shocks at multiple points over the sample period. These factors, namely structural breaks, threshold effects and asymmetric adjustment, are a likely reason why previous studies, on an international scale, have exhibited such conflicting results. Should these studies be reconsidered to incorporate such effects, it would vastly improve the robustness of the results of these studies. It should be noted that the magnitude of the relationship is likely to differ across countries and time periods due to the variation in structural dynamics and macroeconomic conditions. It is therefore improbable that some standard measure of the relationship, such as the conventional theory by Fisher, would accurately estimate the relationship regardless of the sample country or sample period, given the findings in this thesis that the relationship is affected by exogenous factors. Due to the findings of asymmetric adjustment in the third research paper, it is not only the magnitude of the relationship that will cause varied responses, but also potentially the direction of the adjustment. This is investigated further in the fourth paper of this thesis, which aims to disaggregate the overall adjustment coefficient in order to better understand the effects of positive and negative adjustments when they differ substantially from the long-term aggregate relationship. Disaggregating the overall adjustment coefficient into its positive and negative components provided a novel understanding of the dynamics of the relationship. The results of the disaggregation were surprising due to the magnitude of the disparity between the positive and negative adjustments coefficients and indicated that it is important to consider the possibility of imminent fluctuations in inflation when best deciding how to hedge against it. Collectively however, this thesis has proven that equities are able to function as an effective long-run hedge against inflation in South Africa. Further this thesis demonstrates that the inherent assumptions in conventional cointegration techniques, especially those of time-invariance and symmetric adjustment are flawed and have likely contributed to the disparities in the previous literature.
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.
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.