Structural breaks and GARCH models of stock return volatility : the case of South Africa

This paper investigates the empirical relevance of structural breaks in forecasting stock return volatility using both in-sample and out-of-sample tests applied to daily returns of the Johannesburg Stock Exchange (JSE) All Share Index from 07/02/1995 to 08/25/2010. We find evidence of structural breaks in the unconditional variance of the stock returns series over the period, with high levels of persistence and variability in the parameter estimates of the GARCH(1,1) model across the sub-samples defined by the structural breaks. This indicates that structural breaks are empirically relevant to stock return volatility in South Africa. However, based on the out-of-sample forecasting exercise, we find that even though there structural breaks in the volatility , there are no statistical gains from using competing models that explicitly accounts for structural breaks, relative to a GARCH(1,1) model with expanding window. This could be because of the fact that the two identified structural breaks occurred in our out-of-sample, and recursive estimation of the GARCH(1,1) model is perhaps sufficient to account for the effect of the breaks on the parameter estimates. Finally, we highlight that, given the point of the breaks, perhaps what seems more important in South Africa, is accounting for leverage effects, especially in terms of long-horizon forecasting of stock return volatility.www.elsevier.com/locate/ecmodhb201

Essays on financial reforms and monetary policy in Malawi

The thesis contains three essays that investigate the effects of macroeconomic reforms on the Malawian economy between 1980 and 2010. Specifically, the thesis tries to answer three broad questions. First, what is the effect of financial reforms on consumption behavior in Malawi? Second, how did monetary transmission mechanism in Malawi change over time following the implementation of financial reforms? Last, how did the monetary policy respond to foreign aid increases following the implementation of financial reforms in the country? Although answers for these questions are available for other developing countries where abundant research has been conducted, this is not the case in Malawi. Existing research on Malawi has not accounted for the effects of the reforms on consumption behavior, the evolution of the transmission mechanism over time and the monetary policy impact of aid on the economy. Yet such information is very useful in the design and proper implementation of financial and monetary policies that contribute to price stability and economic growth. The first essay assesses whether financial reforms has had a statistically significant effect on Malawi consumption behaviour. More specifically, the essay starts by examining the existence of Permanent Income Hypothesis (PIH) and then proceed to assess whether the reforms have affected consumption behaviour by reducing liquidity constraints. The essay presents a robust account of the financial reforms and constructs financial reform indices for the country. These indices are then used to exam the effects of the reforms on consumption. The essay finds that the PIH does not hold in Malawi. Most consumers are current income consumers (rule-of-thumb). They consume from “hand to mouth” and very little is left to smooth consumption in their life time. The reforms did not shift current income consumers to permanent income consumers. Empirical evidence from the thesis shows that the main failure of the PIH hypothesis is due to liquidity constraint which is manifested in the under development of the financial market and unstable macroeconomic conditions in Malawi. Weak financial institutions, both structural and operational have impacted negatively on the accessibility of financial resources for most Malawians despite the reforms. This is a bigger lesson for policy makers to consider in the preparation of future broad based financial reforms. The second essay provides an empirical analysis of the lag effect of implementing financial reforms on price stability and economic growth. We use the monetary transmission mechanism framework based on the time varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility. It is becoming clear from literature that financial reforms can change the transmission mechanism by changing the overall impact of the policy or by altering the transmission channels overtime. Therefore, the impact of monetary policy on price stability and output growth can vary and portray delayed effects overtime. The essay finds that inflation, real output and exchange rate responses to monetary policy shocks vary over the period under review. Importantly, beginning mid-2000, the monetary policy transmission performed consistently with predictions of economic theory and there is no evidence of price puzzle as found in the previous literature on Malawi. In the last essay, a Bayesian Dynamic Stochastic General Equilibrium (DSGE) model for Malawi is developed and estimated to account for the short-run monetary response to aid inflows in Malawi between 1980 and 2010. The model incorporated the rational expectations of economic agents based on micro foundations. The estimated model showed that monetary authorities reacted to foreign aid inflows. Based on how aid was spent and absorbed in Malawi, aid inflows appeared to be associated with depreciations of the exchange rate rather than the expected real appreciation. There is also evidence of limited impact of a positive aid shock on depreciation and inflation when RBM targets monetary aggregates compared to when the authorities use the Taylor rule and incomplete sterilisation. On the other hand, the thesis found that the implication of increased aid inflows became more prominent in an economy comprising of few economic agents having access to financial assets. Furthermore, the monetary policy responses are much clear consistent with economic theory in a market with less controls over prices and open capital account. The contribution of the thesis to the literature is that, firstly, this looks into the effects of macroeconomic reforms on economic activities in the context of a Sub-Saharan Africa country, Malawi. The thesis enhances the understanding of the effects of macroeconomic reforms on consumption, evolution of monetary policy overtime and the impact of aid inflows on the conduct of monetary policy in Malawi in ways that have not been done before. Secondly, the thesis takes advantages of multivariate econometric methodologies in an attempt to capture both the dynamics of time series data and the relationship among key macroeconomic variables. The thesis develops and estimates a DSGE model for Malawi which is derived from microeconomic foundations of optimisation problem, making it less susceptible to the Lucas critique and thus suitable for policy analysis. The results will help policy makers and development partners such as the IMF and the World Bank in the design of policies and programs that aim at improving the financial sector that is accommodative of achieving price stability and economic growth in Malawi.Thesis (PhD)--University of Pretoria, 2014.lk2014EconomicsPhDunrestricte

An econometric approach

Using panel data econometric techniques, this paper evaluates how public expenditure influences agricultural performance at the district level in Malawi by empirically estimating localized expenditure multipliers for the districts. The results of the analysis show that public expenditures in agriculture have generally positive but variable impacts on agricultural growth at the district level. The paper also finds that there are substantial differences in terms of fiscal multipliers among the districts: most of these multipliers lie below one, although some are above one, while a few are negative. These results confirm that increasing public expenditures in agriculture can yield modest but positive impacts on agricultural productivity. The realization of improved impacts partly depends on both enhancing the quality of public spending and improving the health of public finances across the districts of Malawi.Non-PRIFPRI1; CRP2; MaSSP; DCA; F Strengthening institutions and governance;DSGD; PIMCGIAR Research Program on Policies, Institutions, and Markets (PIM

Investigating public financial accounts and coding system in Malawi and measuring agricultural expenditures within the system

This paper is one of the four diagnostic studies initiated to better understand the black box of public expenditure statistics and how it varies across countries. Particularly, this paper analyzes how government expenditures in agriculture are captured in Malawi’s public financial accounts. It is anticipated that by providing a clear exposition of the manner in which public agriculture expenditures are identified and aggregated using the existing coding structure, this paper would facilitate easy understanding of the levels and composition of the public agricultural expenditures. Such an understanding would ultimately be necessary for determining the link between such allocations and their impact on agricultural growth and hence economic growth. The report starts with a brief background on reforms in the public financial accounts starting with the adoption of the structural adjustment in the 1980s. This is followed by an analysis of the budget and expenditure classification and coding system and a description of the public agriculture expenditure in Malawi. The consolidation and aggregation of data are based on the administrative, program, economic, and functional classification. One of the main findings show that overtime reforms to classification and coding system ensured compliance to international standards as provided in the 2001 Government Finance Statistics of International Monetary Fund and better linkages of expenditure items to the Malawi Growth and Development Strategy.Non-PRIFPRI1; CRP2; PIM 2 Science policy and incentives for innovation; D Transforming Agriculture; DCADSGD; PIMCGIAR Research Program on Policies, Institutions, and Markets (PIM

Localized public investment and agricultural performance in Malawi: Synopsis

This note focuses on how public investments affect crop productivity in Malawi’s districts, and estimates localized public expenditure multipliers. We use these multipliers to analyze whether government expenditures have slowed or accelerated agriculture sector growth, a topic of great interest to public pol-icy makers. Given the relatively large share of government ex-penditure in agriculture sector investment in Malawi, public ex-penditure policies may play an important role in agricultural productivity dynamics.Non-PRIFPRI1; CRP2; MaSSP; DCADSGD; PIMCGIAR Research Program on Policies, Institutions, and Markets (PIM

Tracking agricultural spending when government structures and accounting systems change: The case of Malawi

Tracking agricultural expenditure in developing countries in Sub-Saharan Africa in a consistent and harmonised manner is important, not only in the context of the multilateral spending commitments made under the Comprehensive Africa Agriculture Development Programme, but also in order to gain a better understanding of the impact and efficacy of spending. In this paper, a method for identifying and aggregating spending items from a variety of sources is developed to better understand how agricultural spending has evolved in Malawi. The results show that the central government receives around 90% of agriculture allocations, and this is largely spent on fertiliser subsidies, leaving only limited funding for core strategic functions such as research, extension and irrigation. More generally, lessons learned from the Malawi analysis could potentially be applied in other country contexts with similar experiences in terms of the evolution of accounting systems or government structures

Structural breaks and GARCH models of stock return volatility : the case of South Africa

This paper investigates the empirical relevance of structural breaks in forecasting stock return volatility using both in-sample and out-of-sample tests and daily returns for the Johannesburg Stock Exchange (JSE) All Share Index from 07/02/1995 to 08/25/2010. We find evidence of structural breaks in the unconditional variance of the stock returns series over the period, with high levels of persistence and variability in the parameter estimates of the GARCH (1, 1) model across the sub-samples defined by the structural breaks. This indicates that structural breaks are empirically relevant to stock return volatility in South Africa. In out-of-sample tests, we find that combining forecasts from different benchmark and competing models that accommodate structural breaks in volatility improves the accuracy of volatility forecasting. Furthermore, for shorter horizons, the MS-GARCH model better captures asymmetry in stock return volatility than the GJR-GARCH (1, 1) model, which better suited to longer horizons, but in general, the asymmetric models fail to outperform the GARCH (1,1) model

Tracking agricultural spending when government structures and accounting systems change: The case of Malawi

PRIFPRI3; CRP2PIM; DSGDCGIAR Research Program on Policies, Institutions, and Markets (PIM