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All contributions are welcome, but are subject to an objective selection procedure to ensure that all published articles answer the criteria of scientific objectivity, importance, replicability and intelligibility...read more 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 EXPLORING THE BEHAVIOUR OF ACTIVELY MANAGED, MAXIMALLY DIVERSIFIED PORTFOLIOS (Download sample) Last updated: Sep 18 2020 8:22AM Maximising returns is often the goal of asset management, but in the current (2020) low-interest investment environment, plagued by political, trade and economic uncertainty, managing portfolio risk also plays a significant role. Maximally diversified (MD) read moreMaximising returns is often the goal of asset management, but in the current (2020) low-interest investment environment, plagued by political, trade and economic uncertainty, managing portfolio risk also plays a significant role. Maximally diversified (MD) portfolios are assembled with an emphasis on risk management, not return outperformance. This approach can yield considerable benefits for risk-averse investors. While some work has been done applying this technique to passive portfolios, little to none has been undertaken on active portfolios, restricted by tracking errors (TEs) and evaluated relative to a benchmark. For the first time, actively managed maximum diversification portfolios are scrutinised over time. In booming markets, actively managed MD portfolios generate significant outperformance, but during recessionary periods, no significant benefits emerge. Returns and Sharpe ratios are weak and volatilities high (albeit lower than other strategies). As TE increases, actively managed MD portfolio weights become less confined and adjust ever closer to the overall (unconstrained) MD portfolio weights. Fewer benefits are realised as TEs increase for actively managed MD portfolios compared with the unconstrained alternative. INCOME CONCENTRATION AND ECONOMIC GROWTH IN THE NEOLIBERAL PERIOD (1980-2014) (Download sample) Last updated: Sep 18 2020 8:24AM Fiscal reforms, which were the result of neoliberal economic policies, have led many countries to higher levels of inequality since the 1980s. This paper shows that the impact of income concentration on economic growth is both positive and negative, depending read moreFiscal reforms, which were the result of neoliberal economic policies, have led many countries to higher levels of inequality since the 1980s. This paper shows that the impact of income concentration on economic growth is both positive and negative, depending on the degree of accumulation. A positive relationship is observed when the concentration is moderate, but, when it becomes extreme, its impact turns negative. This trend is reflected in an inverted U-shaped curve. Using a GMM model, for a sample of 31 countries, it is found that the curve undergoes a change of direction when the 99th percentile accounts for approximately 24-26% of the total national income (this turning point is lower for OECD countries [14%] than for non-OECD countries [28%]). Also, the slopes suggest that the negative effects are much greater (about twice) than the positive ones. IS THERE AN INTERDEPENDENCE IN FOREIGN EXCHANGE MARKETS DURING NON-CRISIS PERIODS? EMPIRICAL EVIDENCE FROM MENA COUNTRIES (Download sample) Last updated: Sep 18 2020 8:23AM The purpose of this article is to investigate the existence of volatility interdependence in different fixed-exchange-rates markets during non-crisis periods. Based on daily exchange rates from four Middle East and North African (MENA) countries (Saudi read moreThe purpose of this article is to investigate the existence of volatility interdependence in different fixed-exchange-rates markets during non-crisis periods. Based on daily exchange rates from four Middle East and North African (MENA) countries (Saudi Arabia, Kuwait, Morocco, and Tunisia), we use an original approach, combining proper segmentation of our data sample with univariate and multivariate GARCH models. The main result is that fixed exchange rates do show different levels of volatility interdependence to the international market in both stable and crisis periods. Moreover, the type of exchange rate regime plays a significant role in maintaining the interdependence, while introducing flexibility reforms tend to reduce it and to increase the impacts of past shocks. TRADE OPENNESS, INSTITUTIONS AND FINANCIAL DEVELOPMENT IN SUB-SAHARAN AFRICA (Download sample) Last updated: Sep 18 2020 8:21AM The study aims to determine the connection between trade openness, institutions and financial development for 26 countries in sub-Saharan Africa over the period 1982-2016. The analysis relies on system GMM estimation with 5-year (non-overlapping) averaged read moreThe study aims to determine the connection between trade openness, institutions and financial development for 26 countries in sub-Saharan Africa over the period 1982-2016. The analysis relies on system GMM estimation with 5-year (non-overlapping) averaged data. The results reveal no evidence of a significant impact of trade openness on financial development. There is, however, evidence of a positive (though statistically weakly significant) impact of institutional quality on the development of the financial sector. There is also no evidence of a significant joint impact of the trade openness and institution quality on financial sector development. UNDERSPECIFICATION OF THE EMPIRICAL RETURN-FACTOR MODEL AND A FACTOR ANALYTIC AUGMENTATION AS A SOLUTION TO FACTOR OMISSION (Download sample) Last updated: Sep 18 2020 8:26AM This empirical paper comprehensively sets out the impact of underspecification on a key foundational concept in empirical finance, the linear factor model. It places emphasis on the extensive consequences of factor omission for model estimation and read moreThis empirical paper comprehensively sets out the impact of underspecification on a key foundational concept in empirical finance, the linear factor model. It places emphasis on the extensive consequences of factor omission for model estimation and interpretation. Factor omission in time-series models that relate asset returns to pre-specified factor sets is a common problem. A proposed standard and widely-used solution is the inclusion of a residual market factor which is assumed to be a catch-all proxy for omitted factors. This study shows that a specification that incorporates a set of carefully selected macroeconomic factors will be underspecified. The inclusion of residual market factors will alleviate but not eliminate the consequences of underspecification. Although the early use of factor analytically derived factor scores in factor models has been criticized, augmenting a model comprising pre-specified factors with statistical factors derived from the residuals results in an accurately specified model for which the diagonality assumption holds. Consequently, this paper shows that a factor analytic augmentation is an effective and readily implementable solution to the factor omission problem. USING DYNAMIC PANEL DATA MODELING TO STUDY NET FDI INFLOWS IN MENA COUNTRIES (Download sample) Last updated: Sep 18 2020 8:20AM Foreign direct investment (FDI) plays a critical role in providing financial capital needs, technology transfer, and creating more jobs in the host country. It also helps economies to increase competitiveness and productivity, thereby increasing exports and read moreForeign direct investment (FDI) plays a critical role in providing financial capital needs, technology transfer, and creating more jobs in the host country. It also helps economies to increase competitiveness and productivity, thereby increasing exports and enhancing opportunities for growth and development. Middle East and North Africa (MENA) countries are in desperate need of more FDI inflows to resolve their economic problems. This paper investigates the determinants of net FDI inflows to 23 countries in MENA region during the period from 1995 to 2017 by using static and dynamic panel data analysis. The results indicate that macro determinants, such as gross domestic product (GDP) growth rate, openness, the inflation rate, and public expenditure have a significant impact on net FDI inflows. In addition, we observe that rents from natural resource (oil), exchange rate, and total reserves of foreign exchange and monetary gold do not significantly influence FDI. S.E.E. article: AGGREGATIONAL EFFECTS IN EXTREME VALUE AND GENERALIZED HYPERBOLIC MODELS FOR VALUE-AT-RISK ESTIMATION: EVIDENCE FROM THE NYSE, FTSE, KRX AND TWSE (Download sample) Last updated: Jun 10 2020 9:05AM The accurate estimation of Value-at-Risk (VaR) has become central to the measurement and management of financial risk – in particular, the financial risk inherent in investing in stock markets. While the Gaussian distribution is known to provide an unsuitable read moreThe accurate estimation of Value-at-Risk (VaR) has become central to the measurement and management of financial risk – in particular, the financial risk inherent in investing in stock markets. While the Gaussian distribution is known to provide an unsuitable depiction of daily asset returns, it is a well-established fact that returns taken weekly, monthly or quarterly exhibits (progressively) more Gaussian behaviour. This paper examines such aggregational effect in using two popular families of distributions, namely extreme value models and generalized hyperbolic models, for VaR estimation and contrasts their behaviours against the corresponding Gaussian estimates. The data sets used are returns of indices extracted from the NYSE, FTSE, KRX and TWSE S.E.E. article: DETECTING THE ENVIRONMENTAL KUZNETS CURVE IN AFRICAN COUNTRIES (Download sample) Last updated: Jun 10 2020 9:06AM The growth of the African economy is increasing rapidly since the last decades, but those economic activities affect environmental quality. Researches have shown that an increase in economic activities would lead to environmental degradation which may read moreThe growth of the African economy is increasing rapidly since the last decades, but those economic activities affect environmental quality. Researches have shown that an increase in economic activities would lead to environmental degradation which may eventually cause environmental collapse. In this study we intend to examine the relationship between CO2 emission as a proxy of the environmental quality and gross domestic product (GDP) as a proxy of economic growth in Africa, then to detect and compare the Environmental Kuznets Curve (EKC) between African economic groups. An annual data of forty-eight (48) African countries classified into four economic levels according to World-Bank classification: lower income, lower middle income, lower upper income, and higher income countries for the period between 1960 to 2014, using panel data regression technique. The main findings show that there is a significant positive relationship between CO2 emission and GDP in Africa, as one unit of GDP increase, CO2 emission will increase by 0.37 metric ton in the African continent. Moreover, the analysis shows the existence of the EKC hypothesis of an inverted U-shape curve for all African economic levels with a higher turning point in higher income countries. S.E.E. article: DOES A MONETARY UNION MATTER FOR THE DEGREE OF INFLATION PERSISTENCE? THE CASE OF THE WEST AFRICA MONETARY ZONE (WAMZ) (Download sample) Last updated: Jun 10 2020 9:07AM The literature on the dynamics of inflation appears to have shifted from the question of the root cause of shocks to inflation, to whether the monetary union has a bearing in the measure of the degree or the persistence of the effect of the shocks. To capture read moreThe literature on the dynamics of inflation appears to have shifted from the question of the root cause of shocks to inflation, to whether the monetary union has a bearing in the measure of the degree or the persistence of the effect of the shocks. To capture the specific effect of monetary policy shocks on the persistence of inflation in WAMZ, a multivariate Vector Autoregressive Moving Average GARCH (VARMAGARCH) framework is implemented. The study employs both conventional and conditional time-varying unit root tests to understand the extent to which monetary union influences the degree of inflation persistence. We find the degree of inflation persistence to have been relatively lower since the advent of monetary union in the WAMZ. The significance of this finding is particularly evident when the time-varying property of the persistence is captured. It is also observed that a monetary policy shock has the potential to neutralise the persistence of shocks to inflation at least in the long run, particularly when the timevarying property of the inflation series is captured. S.E.E. article: LIQUIDITY RISK AND ASSET LIABILITY MISMATCHES: EVIDENCE FROM SOUTH AFRICA (Download sample) Last updated: Jun 10 2020 9:04AM Using a panel of South African banks covering the period from 2005 to 2015, we further develop, validate and test the liability mismatch index (LMI) developed by Bai, Krishnamurthy and Weymuller (2018). Deviating from their approach, we develop measures of read moreUsing a panel of South African banks covering the period from 2005 to 2015, we further develop, validate and test the liability mismatch index (LMI) developed by Bai, Krishnamurthy and Weymuller (2018). Deviating from their approach, we develop measures of liquidity that integrate both market liquidity and funding liquidity. Two liquidity measures developed are the bank liquidity mismatch index (BLMI) and the aggregate liquidity mismatch index (ALMI) whose performances are compared and contrasted with the Basel III liquidity measures and traditional liquidity measures. Overall, the two constructed liquidity indices perform better than other liquidity measures. Unlike the LMI, the BLMI and ALMI can be used to evaluate the liquidity of a given bank under liquidity stress events. Our empirical results, though not significant, also show that banks increase their liquidity buffers during times of turmoil as both BLMI and ALMI improved during the period 2007–2009. S.E.E. article: WHEN DOES EXPORT DIVERSIFICATION IMPROVE ECONOMIC GROWTH? A COMPARATIVE ANALYSIS OF SUB-SAHARAN AFRICAN COUNTRIES (Download sample) Last updated: Jun 10 2020 8:54AM There has been increased interest in promoting export diversification as a means of ensuring sustainable growth in most developing countries. Yet, the arguments on the relationships between export diversity and economic growth is not settled in literature, read moreThere has been increased interest in promoting export diversification as a means of ensuring sustainable growth in most developing countries. Yet, the arguments on the relationships between export diversity and economic growth is not settled in literature, with mixed findings concerning the sign and size of the correlation. This study assesses the relationship between export diversification and economic growth in selected Sub-Saharan African countries. Employing fixed effect and generalised least square regression models, with data from the World Bank, the findings show that a U-shaped relationship between export concentration and economic growth: the study finds a positive non-significant relationship for low-income countries, a positive and significant relationship for lower-middle-income countries and negative though not significant relationship for upper-middle-income countries. S.E.E. article: AN EFFICIENCY ANALYSIS OF FEMALE HAIR DRESSERS IN EMPANGENI, SOUTH AFRICA: THE ROLE OF INFRASTRUCTURE (Download sample) Last updated: Jun 10 2020 9:02AM Infrastructure is widely considered an important determinant of firm performance but evidence on its importance on technical efficiency of hairdressers is very limited. Against this background, this study sought to compute and compare the technical efficiency read moreInfrastructure is widely considered an important determinant of firm performance but evidence on its importance on technical efficiency of hairdressers is very limited. Against this background, this study sought to compute and compare the technical efficiency levels of female hairdressers operating by the road side with those operating within formalised and designated salons. Primary cross-sectional data were collected using questionnaires and analysed within a quantitative research design. Technical efficiency was measured using a stochastic frontier technique which, in computing efficiency scores, separates the effect of random factors that are exogenous to the hairdressers. Based on a Cobb Douglas functional form chosen by relevant statistical tests, results from the stochastic frontier model estimated by the maximum likelihood confirm that hairdressers operating in designated saloons are more efficient when compared with hairdressers operating by the road side. A policy implication arising from this finding is that the provision of proper infrastructure is necessary to improve technical efficiency of hairdressers currently operating by the road side. S.E.E. article: EXAMINING THE NON-LINEARITIES IN INFLATION-GROWTH NEXUS: FURTHER EVIDENCE FROM A FIXED-EFFECT PANEL THRESHOLD REGRESSION APPROACH FOR THE SACU REGION (Download sample) Last updated: Feb 3 2020 8:22AM S.E.E. article: THE IMPACT OF CHINA’S FDI AND FDI FROM OTHER SOURCES ON GROWTH IN SUB-SAHARA AFRICA THROUGH EXPORT UPGRADING (Download sample) Last updated: Jan 22 2020 10:19AM This paper seeks to analyse how FDI from China, US, EU, and the rest of Asia transmit to growth in sub-Sahara Africa through export upgrading for the period (2003-2012). Terms-of-trade is utilized as a proxy for export upgrading. We develop a theoretical read moreThis paper seeks to analyse how FDI from China, US, EU, and the rest of Asia transmit to growth in sub-Sahara Africa through export upgrading for the period (2003-2012). Terms-of-trade is utilized as a proxy for export upgrading. We develop a theoretical argument to show that countries with worsening (less than 1%) terms-of-trade are associated with poor industrialization as a result they can hardly improve quality and quantity of their products for export market, vis-àvis. In this respect, this study contributes to existing literature in two ways. First, we investigate if technology embodied in FDI from the above-mentioned sources can enhance quantity and quality improvements of export commodities in sub-Sahara Africa. Second, we account for industrial policy heterogeneity of sub-Sahara African countries in order to determine the threshold level at which FDI-induced export upgrading can contribute positively to growth. Using both 2SLS and PTR models, our results reveal that FDI from China and the rest of Asia does not bear significant impact on growth in sub-Sahara Africa through export upgrading. However, PTR analysis demonstrates that FDI from US and EU seem to have a significant negative impact only below a threshold of 1.08%. As the terms-of-trade improves beyond 1.08%, the estimated coefficients of both FDI from US and EU turn positive, albeit insignificant. We conclude that sub-Sahara African countries are far yet to reach a threshold at which FDI-induced export upgrading can contribute positively to growth. S.E.E. article: SCENARIO-BASED ASSET ALLOCATION WITH FAT TAILS AND NON-LINEAR CORRELATION (Download sample) Last updated: Jan 22 2020 10:22AM This paper highlights the shortfalls of Modern Portfolio Theory (MPT). Amongst other flaws, MPT assumes that returns are normally distributed, that correlations are linear and risks are symmetrical. We propose a dynamic and flexible scenario-based approach to read moreThis paper highlights the shortfalls of Modern Portfolio Theory (MPT). Amongst other flaws, MPT assumes that returns are normally distributed, that correlations are linear and risks are symmetrical. We propose a dynamic and flexible scenario-based approach to portfolio selection that incorporates an investor’s economic forecast. Extreme Value Theory (EVT) is used to capture the skewness and kurtosis inherent in asset class returns and account for the volatility clustering and extreme co-movements across asset classes. The estimation consists of using an asymmetric GJR-GARCH model to extract filtered residuals for each asset class return. Subsequently, a marginal cumulative distribution function (CDF) of each asset class is constructed by using a Gaussian-kernel estimation for the interior, together with a generalised Pareto distribution (GPD) for the upper and lower tails. The distribution of exceedance method is applied to find residuals in the tails. A Student’s t copula is then fitted to the data to induce correlation between the simulated residuals of each asset class. A Monte Carlo technique is applied to simulate standardised residuals, which represent a univariate stochastic process when viewed in isolation but maintain the correlation induced by the copula. The results are mean-CVaR optimised portfolios, which are derived based on an investor’s forward-looking expectation. S.E.E. article: SOUTH AFRICAN HISTORICAL INTEREST RATE VOLATILITY - EVIDENCE OF REGIMESWITCHING (Download sample) Last updated: Jan 22 2020 10:24AM Accurate estimates of volatility are important for the valuation and risk management of financial assets. The benchmark interest rate for many assets in South Africa, the 3-month Jibar, is found to exhibit a high volatility persistence when modelled with a read moreAccurate estimates of volatility are important for the valuation and risk management of financial assets. The benchmark interest rate for many assets in South Africa, the 3-month Jibar, is found to exhibit a high volatility persistence when modelled with a standard generalised autoregressive conditional heteroskedasticity (GARCH) process. The literature suggests that unobserved regime-switching in interest rate data may lead to an overestimation of volatility persistence. In this study 120 GARCH-type volatility models are tested to determine which model, conditional distribution and number of regimes best fit the data in order to extract the most accurate in-sample estimation of historical volatility for asset pricing. The data analysed consists of 877 weekly observations of 3-month Jibar in total, spanning from September 2001 to July 2018. The switching between regimes is governed by a Markov chain process which produces state-dependent transition probabilities for the unobserved regimes. The study finds that a standard single regime GARCH model may not capture the underlying volatility dynamics of the interest rate. The best performing model in this study is the 4 State Threshold-GARCH indicating that in addition to evidence of regime-switching in the data, there is an asymmetric reaction to negative information. S.E.E. article: THE EFFECT OF A CHARTER SCHOOL IN PERU (FE Y ALEGRÍA) ON SCHOOL ACHIEVEMENT: EXPLOITING A SCHOOL LOTTERY SELECTION AS A NATURAL EXPERIMENT (Download sample) Last updated: Jan 22 2020 10:23AM This study estimates the effect of one charter school (a public-private partnership) on mathematics and reading comprehension among second grade students in Peru between 2007 and 2012. The study uses an identification strategy to estimate the causal effect of read moreThis study estimates the effect of one charter school (a public-private partnership) on mathematics and reading comprehension among second grade students in Peru between 2007 and 2012. The study uses an identification strategy to estimate the causal effect of a charter school. The strategy is based on a natural experiment of an admission lottery to determine which students would be accepted into second grade at the charter school. The results show that the charter school achieved substantial gains in the scores of the lottery winners that are equivalent to 0.4 standard deviations. We also find that this effect has increased over time.
S.E.E. article (Archive) The Journal for Studies in Economics and Econometrics (S.E.E) is an international journal that publishes articles in the field of study of Economics (in the widest sense of the word). It is a combined product of the BER and the Graduate School of Business at Stellenbosch University. All contributions are welcome, but are subject to an objective selection procedure to ensure that all published articles answer the criteria of scientific objectivity, importance, replicability and intelligibility...read more 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 EXPLORING THE BEHAVIOUR OF ACTIVELY MANAGED, MAXIMALLY DIVERSIFIED PORTFOLIOS (Download sample) Last updated: Sep 18 2020 8:22AM Maximising returns is often the goal of asset management, but in the current (2020) low-interest investment environment, plagued by political, trade and economic uncertainty, managing portfolio risk also plays a significant role. Maximally diversified (MD) read moreMaximising returns is often the goal of asset management, but in the current (2020) low-interest investment environment, plagued by political, trade and economic uncertainty, managing portfolio risk also plays a significant role. Maximally diversified (MD) portfolios are assembled with an emphasis on risk management, not return outperformance. This approach can yield considerable benefits for risk-averse investors. While some work has been done applying this technique to passive portfolios, little to none has been undertaken on active portfolios, restricted by tracking errors (TEs) and evaluated relative to a benchmark. For the first time, actively managed maximum diversification portfolios are scrutinised over time. In booming markets, actively managed MD portfolios generate significant outperformance, but during recessionary periods, no significant benefits emerge. Returns and Sharpe ratios are weak and volatilities high (albeit lower than other strategies). As TE increases, actively managed MD portfolio weights become less confined and adjust ever closer to the overall (unconstrained) MD portfolio weights. Fewer benefits are realised as TEs increase for actively managed MD portfolios compared with the unconstrained alternative. INCOME CONCENTRATION AND ECONOMIC GROWTH IN THE NEOLIBERAL PERIOD (1980-2014) (Download sample) Last updated: Sep 18 2020 8:24AM Fiscal reforms, which were the result of neoliberal economic policies, have led many countries to higher levels of inequality since the 1980s. This paper shows that the impact of income concentration on economic growth is both positive and negative, depending read moreFiscal reforms, which were the result of neoliberal economic policies, have led many countries to higher levels of inequality since the 1980s. This paper shows that the impact of income concentration on economic growth is both positive and negative, depending on the degree of accumulation. A positive relationship is observed when the concentration is moderate, but, when it becomes extreme, its impact turns negative. This trend is reflected in an inverted U-shaped curve. Using a GMM model, for a sample of 31 countries, it is found that the curve undergoes a change of direction when the 99th percentile accounts for approximately 24-26% of the total national income (this turning point is lower for OECD countries [14%] than for non-OECD countries [28%]). Also, the slopes suggest that the negative effects are much greater (about twice) than the positive ones. IS THERE AN INTERDEPENDENCE IN FOREIGN EXCHANGE MARKETS DURING NON-CRISIS PERIODS? EMPIRICAL EVIDENCE FROM MENA COUNTRIES (Download sample) Last updated: Sep 18 2020 8:23AM The purpose of this article is to investigate the existence of volatility interdependence in different fixed-exchange-rates markets during non-crisis periods. Based on daily exchange rates from four Middle East and North African (MENA) countries (Saudi read moreThe purpose of this article is to investigate the existence of volatility interdependence in different fixed-exchange-rates markets during non-crisis periods. Based on daily exchange rates from four Middle East and North African (MENA) countries (Saudi Arabia, Kuwait, Morocco, and Tunisia), we use an original approach, combining proper segmentation of our data sample with univariate and multivariate GARCH models. The main result is that fixed exchange rates do show different levels of volatility interdependence to the international market in both stable and crisis periods. Moreover, the type of exchange rate regime plays a significant role in maintaining the interdependence, while introducing flexibility reforms tend to reduce it and to increase the impacts of past shocks. TRADE OPENNESS, INSTITUTIONS AND FINANCIAL DEVELOPMENT IN SUB-SAHARAN AFRICA (Download sample) Last updated: Sep 18 2020 8:21AM The study aims to determine the connection between trade openness, institutions and financial development for 26 countries in sub-Saharan Africa over the period 1982-2016. The analysis relies on system GMM estimation with 5-year (non-overlapping) averaged read moreThe study aims to determine the connection between trade openness, institutions and financial development for 26 countries in sub-Saharan Africa over the period 1982-2016. The analysis relies on system GMM estimation with 5-year (non-overlapping) averaged data. The results reveal no evidence of a significant impact of trade openness on financial development. There is, however, evidence of a positive (though statistically weakly significant) impact of institutional quality on the development of the financial sector. There is also no evidence of a significant joint impact of the trade openness and institution quality on financial sector development. UNDERSPECIFICATION OF THE EMPIRICAL RETURN-FACTOR MODEL AND A FACTOR ANALYTIC AUGMENTATION AS A SOLUTION TO FACTOR OMISSION (Download sample) Last updated: Sep 18 2020 8:26AM This empirical paper comprehensively sets out the impact of underspecification on a key foundational concept in empirical finance, the linear factor model. It places emphasis on the extensive consequences of factor omission for model estimation and read moreThis empirical paper comprehensively sets out the impact of underspecification on a key foundational concept in empirical finance, the linear factor model. It places emphasis on the extensive consequences of factor omission for model estimation and interpretation. Factor omission in time-series models that relate asset returns to pre-specified factor sets is a common problem. A proposed standard and widely-used solution is the inclusion of a residual market factor which is assumed to be a catch-all proxy for omitted factors. This study shows that a specification that incorporates a set of carefully selected macroeconomic factors will be underspecified. The inclusion of residual market factors will alleviate but not eliminate the consequences of underspecification. Although the early use of factor analytically derived factor scores in factor models has been criticized, augmenting a model comprising pre-specified factors with statistical factors derived from the residuals results in an accurately specified model for which the diagonality assumption holds. Consequently, this paper shows that a factor analytic augmentation is an effective and readily implementable solution to the factor omission problem. USING DYNAMIC PANEL DATA MODELING TO STUDY NET FDI INFLOWS IN MENA COUNTRIES (Download sample) Last updated: Sep 18 2020 8:20AM Foreign direct investment (FDI) plays a critical role in providing financial capital needs, technology transfer, and creating more jobs in the host country. It also helps economies to increase competitiveness and productivity, thereby increasing exports and read moreForeign direct investment (FDI) plays a critical role in providing financial capital needs, technology transfer, and creating more jobs in the host country. It also helps economies to increase competitiveness and productivity, thereby increasing exports and enhancing opportunities for growth and development. Middle East and North Africa (MENA) countries are in desperate need of more FDI inflows to resolve their economic problems. This paper investigates the determinants of net FDI inflows to 23 countries in MENA region during the period from 1995 to 2017 by using static and dynamic panel data analysis. The results indicate that macro determinants, such as gross domestic product (GDP) growth rate, openness, the inflation rate, and public expenditure have a significant impact on net FDI inflows. In addition, we observe that rents from natural resource (oil), exchange rate, and total reserves of foreign exchange and monetary gold do not significantly influence FDI. S.E.E. article: AGGREGATIONAL EFFECTS IN EXTREME VALUE AND GENERALIZED HYPERBOLIC MODELS FOR VALUE-AT-RISK ESTIMATION: EVIDENCE FROM THE NYSE, FTSE, KRX AND TWSE (Download sample) Last updated: Jun 10 2020 9:05AM The accurate estimation of Value-at-Risk (VaR) has become central to the measurement and management of financial risk – in particular, the financial risk inherent in investing in stock markets. While the Gaussian distribution is known to provide an unsuitable read moreThe accurate estimation of Value-at-Risk (VaR) has become central to the measurement and management of financial risk – in particular, the financial risk inherent in investing in stock markets. While the Gaussian distribution is known to provide an unsuitable depiction of daily asset returns, it is a well-established fact that returns taken weekly, monthly or quarterly exhibits (progressively) more Gaussian behaviour. This paper examines such aggregational effect in using two popular families of distributions, namely extreme value models and generalized hyperbolic models, for VaR estimation and contrasts their behaviours against the corresponding Gaussian estimates. The data sets used are returns of indices extracted from the NYSE, FTSE, KRX and TWSE S.E.E. article: DETECTING THE ENVIRONMENTAL KUZNETS CURVE IN AFRICAN COUNTRIES (Download sample) Last updated: Jun 10 2020 9:06AM The growth of the African economy is increasing rapidly since the last decades, but those economic activities affect environmental quality. Researches have shown that an increase in economic activities would lead to environmental degradation which may read moreThe growth of the African economy is increasing rapidly since the last decades, but those economic activities affect environmental quality. Researches have shown that an increase in economic activities would lead to environmental degradation which may eventually cause environmental collapse. In this study we intend to examine the relationship between CO2 emission as a proxy of the environmental quality and gross domestic product (GDP) as a proxy of economic growth in Africa, then to detect and compare the Environmental Kuznets Curve (EKC) between African economic groups. An annual data of forty-eight (48) African countries classified into four economic levels according to World-Bank classification: lower income, lower middle income, lower upper income, and higher income countries for the period between 1960 to 2014, using panel data regression technique. The main findings show that there is a significant positive relationship between CO2 emission and GDP in Africa, as one unit of GDP increase, CO2 emission will increase by 0.37 metric ton in the African continent. Moreover, the analysis shows the existence of the EKC hypothesis of an inverted U-shape curve for all African economic levels with a higher turning point in higher income countries. S.E.E. article: DOES A MONETARY UNION MATTER FOR THE DEGREE OF INFLATION PERSISTENCE? THE CASE OF THE WEST AFRICA MONETARY ZONE (WAMZ) (Download sample) Last updated: Jun 10 2020 9:07AM The literature on the dynamics of inflation appears to have shifted from the question of the root cause of shocks to inflation, to whether the monetary union has a bearing in the measure of the degree or the persistence of the effect of the shocks. To capture read moreThe literature on the dynamics of inflation appears to have shifted from the question of the root cause of shocks to inflation, to whether the monetary union has a bearing in the measure of the degree or the persistence of the effect of the shocks. To capture the specific effect of monetary policy shocks on the persistence of inflation in WAMZ, a multivariate Vector Autoregressive Moving Average GARCH (VARMAGARCH) framework is implemented. The study employs both conventional and conditional time-varying unit root tests to understand the extent to which monetary union influences the degree of inflation persistence. We find the degree of inflation persistence to have been relatively lower since the advent of monetary union in the WAMZ. The significance of this finding is particularly evident when the time-varying property of the persistence is captured. It is also observed that a monetary policy shock has the potential to neutralise the persistence of shocks to inflation at least in the long run, particularly when the timevarying property of the inflation series is captured. S.E.E. article: LIQUIDITY RISK AND ASSET LIABILITY MISMATCHES: EVIDENCE FROM SOUTH AFRICA (Download sample) Last updated: Jun 10 2020 9:04AM Using a panel of South African banks covering the period from 2005 to 2015, we further develop, validate and test the liability mismatch index (LMI) developed by Bai, Krishnamurthy and Weymuller (2018). Deviating from their approach, we develop measures of read moreUsing a panel of South African banks covering the period from 2005 to 2015, we further develop, validate and test the liability mismatch index (LMI) developed by Bai, Krishnamurthy and Weymuller (2018). Deviating from their approach, we develop measures of liquidity that integrate both market liquidity and funding liquidity. Two liquidity measures developed are the bank liquidity mismatch index (BLMI) and the aggregate liquidity mismatch index (ALMI) whose performances are compared and contrasted with the Basel III liquidity measures and traditional liquidity measures. Overall, the two constructed liquidity indices perform better than other liquidity measures. Unlike the LMI, the BLMI and ALMI can be used to evaluate the liquidity of a given bank under liquidity stress events. Our empirical results, though not significant, also show that banks increase their liquidity buffers during times of turmoil as both BLMI and ALMI improved during the period 2007–2009. S.E.E. article: WHEN DOES EXPORT DIVERSIFICATION IMPROVE ECONOMIC GROWTH? A COMPARATIVE ANALYSIS OF SUB-SAHARAN AFRICAN COUNTRIES (Download sample) Last updated: Jun 10 2020 8:54AM There has been increased interest in promoting export diversification as a means of ensuring sustainable growth in most developing countries. Yet, the arguments on the relationships between export diversity and economic growth is not settled in literature, read moreThere has been increased interest in promoting export diversification as a means of ensuring sustainable growth in most developing countries. Yet, the arguments on the relationships between export diversity and economic growth is not settled in literature, with mixed findings concerning the sign and size of the correlation. This study assesses the relationship between export diversification and economic growth in selected Sub-Saharan African countries. Employing fixed effect and generalised least square regression models, with data from the World Bank, the findings show that a U-shaped relationship between export concentration and economic growth: the study finds a positive non-significant relationship for low-income countries, a positive and significant relationship for lower-middle-income countries and negative though not significant relationship for upper-middle-income countries. S.E.E. article: AN EFFICIENCY ANALYSIS OF FEMALE HAIR DRESSERS IN EMPANGENI, SOUTH AFRICA: THE ROLE OF INFRASTRUCTURE (Download sample) Last updated: Jun 10 2020 9:02AM Infrastructure is widely considered an important determinant of firm performance but evidence on its importance on technical efficiency of hairdressers is very limited. Against this background, this study sought to compute and compare the technical efficiency read moreInfrastructure is widely considered an important determinant of firm performance but evidence on its importance on technical efficiency of hairdressers is very limited. Against this background, this study sought to compute and compare the technical efficiency levels of female hairdressers operating by the road side with those operating within formalised and designated salons. Primary cross-sectional data were collected using questionnaires and analysed within a quantitative research design. Technical efficiency was measured using a stochastic frontier technique which, in computing efficiency scores, separates the effect of random factors that are exogenous to the hairdressers. Based on a Cobb Douglas functional form chosen by relevant statistical tests, results from the stochastic frontier model estimated by the maximum likelihood confirm that hairdressers operating in designated saloons are more efficient when compared with hairdressers operating by the road side. A policy implication arising from this finding is that the provision of proper infrastructure is necessary to improve technical efficiency of hairdressers currently operating by the road side. S.E.E. article: EXAMINING THE NON-LINEARITIES IN INFLATION-GROWTH NEXUS: FURTHER EVIDENCE FROM A FIXED-EFFECT PANEL THRESHOLD REGRESSION APPROACH FOR THE SACU REGION (Download sample) Last updated: Feb 3 2020 8:22AM S.E.E. article: THE IMPACT OF CHINA’S FDI AND FDI FROM OTHER SOURCES ON GROWTH IN SUB-SAHARA AFRICA THROUGH EXPORT UPGRADING (Download sample) Last updated: Jan 22 2020 10:19AM This paper seeks to analyse how FDI from China, US, EU, and the rest of Asia transmit to growth in sub-Sahara Africa through export upgrading for the period (2003-2012). Terms-of-trade is utilized as a proxy for export upgrading. We develop a theoretical read moreThis paper seeks to analyse how FDI from China, US, EU, and the rest of Asia transmit to growth in sub-Sahara Africa through export upgrading for the period (2003-2012). Terms-of-trade is utilized as a proxy for export upgrading. We develop a theoretical argument to show that countries with worsening (less than 1%) terms-of-trade are associated with poor industrialization as a result they can hardly improve quality and quantity of their products for export market, vis-àvis. In this respect, this study contributes to existing literature in two ways. First, we investigate if technology embodied in FDI from the above-mentioned sources can enhance quantity and quality improvements of export commodities in sub-Sahara Africa. Second, we account for industrial policy heterogeneity of sub-Sahara African countries in order to determine the threshold level at which FDI-induced export upgrading can contribute positively to growth. Using both 2SLS and PTR models, our results reveal that FDI from China and the rest of Asia does not bear significant impact on growth in sub-Sahara Africa through export upgrading. However, PTR analysis demonstrates that FDI from US and EU seem to have a significant negative impact only below a threshold of 1.08%. As the terms-of-trade improves beyond 1.08%, the estimated coefficients of both FDI from US and EU turn positive, albeit insignificant. We conclude that sub-Sahara African countries are far yet to reach a threshold at which FDI-induced export upgrading can contribute positively to growth. S.E.E. article: SCENARIO-BASED ASSET ALLOCATION WITH FAT TAILS AND NON-LINEAR CORRELATION (Download sample) Last updated: Jan 22 2020 10:22AM This paper highlights the shortfalls of Modern Portfolio Theory (MPT). Amongst other flaws, MPT assumes that returns are normally distributed, that correlations are linear and risks are symmetrical. We propose a dynamic and flexible scenario-based approach to read moreThis paper highlights the shortfalls of Modern Portfolio Theory (MPT). Amongst other flaws, MPT assumes that returns are normally distributed, that correlations are linear and risks are symmetrical. We propose a dynamic and flexible scenario-based approach to portfolio selection that incorporates an investor’s economic forecast. Extreme Value Theory (EVT) is used to capture the skewness and kurtosis inherent in asset class returns and account for the volatility clustering and extreme co-movements across asset classes. The estimation consists of using an asymmetric GJR-GARCH model to extract filtered residuals for each asset class return. Subsequently, a marginal cumulative distribution function (CDF) of each asset class is constructed by using a Gaussian-kernel estimation for the interior, together with a generalised Pareto distribution (GPD) for the upper and lower tails. The distribution of exceedance method is applied to find residuals in the tails. A Student’s t copula is then fitted to the data to induce correlation between the simulated residuals of each asset class. A Monte Carlo technique is applied to simulate standardised residuals, which represent a univariate stochastic process when viewed in isolation but maintain the correlation induced by the copula. The results are mean-CVaR optimised portfolios, which are derived based on an investor’s forward-looking expectation. S.E.E. article: SOUTH AFRICAN HISTORICAL INTEREST RATE VOLATILITY - EVIDENCE OF REGIMESWITCHING (Download sample) Last updated: Jan 22 2020 10:24AM Accurate estimates of volatility are important for the valuation and risk management of financial assets. The benchmark interest rate for many assets in South Africa, the 3-month Jibar, is found to exhibit a high volatility persistence when modelled with a read moreAccurate estimates of volatility are important for the valuation and risk management of financial assets. The benchmark interest rate for many assets in South Africa, the 3-month Jibar, is found to exhibit a high volatility persistence when modelled with a standard generalised autoregressive conditional heteroskedasticity (GARCH) process. The literature suggests that unobserved regime-switching in interest rate data may lead to an overestimation of volatility persistence. In this study 120 GARCH-type volatility models are tested to determine which model, conditional distribution and number of regimes best fit the data in order to extract the most accurate in-sample estimation of historical volatility for asset pricing. The data analysed consists of 877 weekly observations of 3-month Jibar in total, spanning from September 2001 to July 2018. The switching between regimes is governed by a Markov chain process which produces state-dependent transition probabilities for the unobserved regimes. The study finds that a standard single regime GARCH model may not capture the underlying volatility dynamics of the interest rate. The best performing model in this study is the 4 State Threshold-GARCH indicating that in addition to evidence of regime-switching in the data, there is an asymmetric reaction to negative information. S.E.E. article: THE EFFECT OF A CHARTER SCHOOL IN PERU (FE Y ALEGRÍA) ON SCHOOL ACHIEVEMENT: EXPLOITING A SCHOOL LOTTERY SELECTION AS A NATURAL EXPERIMENT (Download sample) Last updated: Jan 22 2020 10:23AM This study estimates the effect of one charter school (a public-private partnership) on mathematics and reading comprehension among second grade students in Peru between 2007 and 2012. The study uses an identification strategy to estimate the causal effect of read moreThis study estimates the effect of one charter school (a public-private partnership) on mathematics and reading comprehension among second grade students in Peru between 2007 and 2012. The study uses an identification strategy to estimate the causal effect of a charter school. The strategy is based on a natural experiment of an admission lottery to determine which students would be accepted into second grade at the charter school. The results show that the charter school achieved substantial gains in the scores of the lottery winners that are equivalent to 0.4 standard deviations. We also find that this effect has increased over time.