The Influence of Political, Economic, and Financial Risks on the South African Global Equity Portfolio Returns under Changing Market Conditions

Country risk is one of major determinants of investors’ decisions in pursuit of diversification opportunities and equity portfolio returns maximisation. This study investigates the effect of disaggregated country risk on South African global equity portfolio returns under fluctuating market conditions. Markov regime switching model was applied monthly data from January 2000 to December 2019. The study findings revealed that the foreign equity portfolio market moves between inefficiency and efficiency. Implying that country risks impact equity portfolio returns in foreign countries and the latter changes with market conditions. The results also indicated that more equity portfolios stay in bear market for extended periods compared to the amount of time spent in bull market. In other words, foreign portfolio equity market has been dominated by declining returns over the sample period. Additionally, all the assessed portfolios were affected by the country risk components. Yet, political risk proved to have dominant effect on foreign portfolios than other risk components. Consequently, political risk cannot be diversified through investing in alternative foreign portfolios

Public Spending- Private Investment Nexus in South Africa

This paper empirically investigates the association between different components of government spending and private investment in South Africa. Using autoregressive distributed lags (ARDL) analysis, we examine data span5ning from 2005q2 and 2022q1. Our results reveal distinct impacts of various government spending components on private investment. Specifically, we find that education spending has a significant effect in the long run but lacks significant short-term impact. Moreover, expenditures on housing and environmental protection stimulate investment, indicating a crowding-in effect. Conversely, health spending shows a negative long-term effect on investment, although its short-term impact is not significant. Notably, military expenditure is found to detrimentally affect private investment in South Africa. Our findings suggest the potential for reallocating resources among different spending categories without necessarily undermining investment. Furthermore, they underscore the potential for enhancing investment and fostering growth in South Africa by channelling more resources toward education, environmental protection, and housing

The Exchange Rate Pass-Through: Evidence of South Africa

Understanding the role of the exchange rate behaviour in domestic prices is crucial for monetary authorities in anticipating inflation. Over the last 28 years (1994 – 2022), the inflation rate in South Africa has increased, averaging at 5.7% per year. It is believed that some of the increase in the inflation rate is a result of trade, hence this study aims at identifying how much of the changes in the exchange rate is passed on to domestic inflation. This idea is of interest in a country like South Africa that had implemented inflation targeting. The study identifies two channels of the exchange rate pass-through (ERPT); direct and indirect. the direct involves the change in import prices that is associated with the change in the exchange rate. The indirect channel involves the change in consumer price index (CPI) and the producer price index (PPI) that is associated with a change in import prices. The study uses monthly data from 1994 – 2022 to identify the speed and the magnitude of the exchange rate pass-through to domestic prices in the short-run and the long-run. Using the vector autoregressive model (VAR) and the vector error correction model the results shows that the magnitude of the exchange rate pass-through to import prices is relatively higher than the exchange pass-through to the CPI and PPI and that import prices; CPI and PPI increases immediately after an increase in the exchange rate

Does Options Bolster Capital Markets in South Africa?

This study examines the impact of option on South African’s capital markets over the period 1991–2020. Using put–call open interest ratios (PCOIR) and put–call volume ratios (PCVR), we test whether option sentiment provides predictive signals beyond conventional macro-financial variables. Applying quantile regression with robustness checks for asymmetry, regime dependence, and macro-financial interactions, we find that option sentiment significantly predicts equity and bond returns, with bearish signals exerting stronger effects than bullish ones. The predictive influence intensifies during periods of heightened volatility and financial stress, and its strength varies with liquidity conditions and monetary policy stance. Overall, the findings show that option sentiment is both a reflection of investor expectations and a driver of asset price dynamics, underscoring its informational role in South Africa’s capital markets

The Movement of Exchange Rate and Expected Income: Case of South Africa

Many studies have investigated the impact of expectations on the exchange rates. However, it remains a challenge linking the exchange rates to its fundamentals. This study seeks to determine the impact of expectations of future income on the exchange rates behaviour. In this study, we employ the Bayesian VAR method. The study finds that the expectations of income have effects on the exchange rate behaviour. Furthermore, the exchange rates behaviour is asymmetric

Spillover Volatility Effect Return Of Stock, Gold, and Cryptocurrency: Evidence of Peak Pandemic and Transition towards Endemic COVID-19 in Indonesia

This study examines the volatility spillover effects among stock, gold, and cryptocurrency returns during the peak of the COVID-19 pandemic and the transition to the endemic phase. The objective is to identify and model the volatility of these three investment instruments using GARCH/EGARCH for univariate modeling and BEKK-GARCH/BEKK-Asymmetric GARCH for multivariate modeling. The study utilizes daily highest price data from November 1, 2020, to April 30, 2022, and from May 1, 2022, to December 31, 2022. The findings reveal that cryptocurrency is the most volatile asset during both the peak of the pandemic and the transitional period towards endemic COVID-19. Gold serves as a safe haven for cryptocurrency in both periods. Additionally, gold acts as a diversifier for stocks, and vice versa, while stocks also diversify cryptocurrency risk during the pandemic peak. These insights hold significant implications for portfolio risk management, enabling investors to diversify portfolios across instruments with varying risk profiles

Impact of Fiscal Consolidation on Government Debt in South Africa: Evidence to Structural and Cyclical Effect

The purpose of this paper is to examine the fiscal consolidation impact on government debt in South Africa (SA) looking at both structural and cyclical effects. The paper employs the Structural Vector Autoregression (SVAR) using time-series data from 1990 to 2020 in South Africa. The key contribution of the paper is it with a focus on the effect of fiscal consolidation as well as investigation of the structural and cyclical component effect of government expenditure cut as well as a tax increase in a developing economy like South Africa. We found that government debt falls as of the result of fiscal consolidation achieved through government expenditure cut. The fiscal consolidation of tax increases is better than based on government expenditure cut. The cyclical component of government expenditure increases domestic government debt. This is also found in the structural government expenditure results in an increase in domestic government debt

The Dynamic Linkages among Gold Prices, Stock Prices, the Exchange Rate and Interest Rate in South Africa

The fundamental aim of this study is to examine the intricate interplay among gold prices, interest rates, exchange rates, and stock price indices within the context of South Africa. To achieve this, both a conventional Vector Autoregression Model and a Bayesian Vector Autoregression Model were applied to monthly data spanning from June 1995 to December 2022. The findings indicate that a positive shock in stock prices triggers positive reactions in exchange rates, gold prices, and interest rates. Conversely, a positive shock in interest rates induces negative reactions in both gold prices and stock prices. Moreover, a positive shock in gold prices elicits negative responses in both interest rates and stock prices. Additionally, a positive shock in exchange rates prompts positive reactions in gold prices and interest rates, while simultaneously resulting in a negative response in stock prices

Fiscal Councils and Creative Accounting in EU Member States

We study the relationship between fiscal councils and creative accounting in 27 European Union (EU) countries. We use stock-flow adjustments to indicate creative accounting and relate them to our fiscal council indicator in a panel framework. Regarding the fiscal rules that trigger creative accounting, we distinguish between external (resulting from European Monetary Union membership) and internal fiscal rules. While fiscal councils are not significant when used as stand-alone variable their interaction with fiscal rules is significant. Our findings indicate that fiscal councils reduce creative accounting triggered by fiscal rules and thus help to enforce fiscal rules and sound fiscal policies

Bond Indices Maturities and Changing Macroeconomic Conditions: Evidence from South Africa

This paper examines the effect of macroeconomic variables on government bond yields of different maturities under two regimes in South Africa. The study employs a Two-Stage Markov regime-switching model to analyze monthly time series data from March 2009 to October 2022. It attempts to explain variations in 1-3 year, 3-7 year, 7-12 year and +12 year government bond yields with six independent variables such as inflation, real GDP, real short-term interest rates, real long-term interest rates, real money supply, and the real Rand/Dollar exchange rate. As a result, the study finds that the performance of government bond yields varies with market conditions, as per the adaptive market hypothesis (AMH). More specifically, the returns of the 1-3 year bond index are influenced by real GDP in a bull regime, while the performance of the 3-7 year government bond yield is affected by real GDP in a bear market condition. Additionally, the inflation growth rate influences the performance of the 7-12 year government bond yield in a bull market regime, but not in a bear regime. It also documents that the bear market conditions prevail among selected bond index returns, with the 12-year government bond yield staying in a bull state for 12 months, while the 7-12 year government bond yield stays the longest in a bear state (19 months). These findings demonstrate that the South African bond market is affected by changing conditions. Therefore, the interaction between the macroeconomy and bond performance is better explained by AMH, and there is potential for improved explanatory power through the use of nonlinear modeling techniques