The explanatory power of the yield curve in predicting recessions in South Africa

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The Explanatory Power Of The Yield Curve In Predicting Recessions In South Africa

The term structure of interest rates, particularly the term spreaddetermined from the difference between ten-year government bond yields andthree-month Treasury bill yields, has received increased attention as avaluable forecasting tool for the purposes of monetary policy and recessionforecasting. This is on the back of the observed positive relationship betweenterm spread and economic activity. Moreover, the term spread has been observedto invert prior to the occurrence of economic recessions both in developed anddeveloping countries.This study investigated the forecasting ability of the South African(S.A.) term spread in predicting S.A. recessions, taking into account therecent global economic recession. The motivation is due to the forecastingconsistencies illustrated by the term spread in providing statisticallyincorrect signals of recession in 2003, which did not transit into reality. Itimplied a weak relationship between the S.A. term spread and economic activity.Moreover, based on observations from the literature that term spreads andeconomic activities across countries are correlated, the term spreads of China,United States (U.S.) and Germany were investigated and compared to the S.A.term spread to determine which better forecasts S.A. recessions. The studyemployed the Dynamic Probit Model since it is considered to provide a betterpredictive edge over the Traditional Static Probit model.The findings revealed that the S.A. term spread accurately predicted allthe S.A recessions since 1980; Chinese term spread accurately predicted the1996 and 2008 S.A recessions; U.S. term spread predicted some recessions; whileGerman term spread predictions were counter-cyclical

The effect of a sovereign credit rating change on share prices of the South African retail banks

Abstract: The increasing role of credit rating agencies in emerging markets and the various impacts that these rating agencies have on emerging market economies have become of great interest in modern finance. Recent empirical evidence suggests that credit rating downgrades have the potential to disrupt economies. To minimise and control such disruption, it is essential to establish what exactly these disruptions entitles. This study aims to determine whether a South African sovereign credit rating downgrade caused abnormal returns in the shares of local retail banks. Furthermore, the study sets out to determine whether A South African sovereign credit rating downgrade resulted in significant volatility spillover on the shares of South African retail banks. An event study analysis will be implemented to determine whether a downgrade caused abnormal returns, and the presence of volatility spillovers will be determined by means of a GARCH-BEKK model. The main findings indicates that a South African sovereign credit downgrade did result in negative cumulated abnormal returns, and that a change in the South African sovereign credit rating did cause volatility in the shares of South African retail banks. These share price effects can have various implications, such as spillovers to other parts of the equity market, as well as negative spillovers to the real economy. In order to mitigate the potential implications of a South African sovereign credit rating change through the South African retail banking sector, the effects of such a change must first be determined, making this an important study to conduct

The effect of sheared diamagnetic flow on turbulent structures generated by the Charney–Hasegawa–Mima equation

The generation of electrostatic drift wave turbulence is modelled by the Charney–Hasegawa–Mima equation. The equilibrium density gradient n0=n0(x) is chosen so that dn0 /dx is nonzero and spatially variable (i.e., v*e is sheared). It is shown that this sheared diamagnetic flow leads to localized turbulence which is concentrated at max(grad n0), with a large dv*e/dx inhibiting the spread of the turbulence in the x direction. Coherent structures form which propagate with the local v*e in the y direction. Movement in the x direction is accompanied by a change in their amplitudes. When the numerical code is initialized with a single wave, the plasma behaviour is dominated by the initial mode and its harmonics

Modelling the business cycle in South Africa : a non-linear approach

In this paper the South African business cycle is modeled, using a simple linear method and comparing it to non-linear methods. This is useful to address the debate between the Classical and Keynesian economists regarding their views on the business cycle. They believe in a stable economy with exogenous shocks and an unstable economy with an endogenous business cycle respectively. Linear models are usually associated with the Classical view and non-linear models with the Keynesian view. A detailed discussion on the non-linear model-building process, with particular emphasis on the family of STAR models is done. The South African GDP is used and AR, TAR, LSTAR and ESTAR models are fitted and compared. It finds that a parameterized nonlinear model (such as the family of STAR models) outperforms the simple regression model. This is due to asymmetric behaviour in the GDP data and the possibility of a threshold between a recession and an expansion. The results in this paper support the structural or institutional view of business cycles, which states that economic fluctuations are caused by various structural or institutional changes

A comparison of cointegration and copula asset allocation approaches

The empirical performance of cointegration and copula asset allocation techniques are compared against that of the market. Multivariate copula structures are used to derive index-tracking portfolios which are then compared with that of portfolios constructed using cointegration techniques. The results suggest that modelling the long-term relationships between stocks by means of the cointegration approach do not consistently lead to portfolios that outperform the benchmark. Using a short-term asset allocation approach, such as the copula-simulation approach, lead to portfolios that perform at least as well as the cointegration portfolios