Working Papers (Economics)

Permanent URI for this collectionhttp://hdl.handle.net/2263/4249

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Structural breaks and GARCH models of stock return volatility : the case of South Africa
(University of Pretoria, Department of Economics, 2010-12) Babikir, Ali; Owusu-Sekyere, Emmanuel; rangan.gupta@up.ac.za; Gupta, Rangan; Mwabutwa, Chance
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.
The long-run impact of inflation in South Africa
(University of Pretoria, Department of Economics, 2010-12) Kengne, Beatrice D. Simo; rangan.gupta@up.ac.za; Amusa, Kafayat; Gupta, Rangan; Karolia, Shaakira
This paper evaluates the hypothesis of long-run super-neutrality of money (LRSN) within the context of the South African economy. The long-run impact of inflation on the interest rate and subsequently, output is estimated by employing a trivariate structural vector autoregression model. The estimation results suggest that the hypothesis of LRSN cannot be rejected, thereby potentially supporting the arguments asserted by Sidrauski (1967).
The long-run relationship between inflation and real stock prices : empirical evidence from South Africa
(University of Pretoria, Department of Economics, 2010-12) Arjoon, Riona; Rangan.Gupta@up.ac.za; Botes, Mariette; Chesang, Laban K.; Gupta, Rangan
The existing literature on the theoretical relationship between the rate of inflation and real stock prices in an economy has shown varied predictions about the long run effects of inflation on real stock prices. In this paper, we present some time series evidence on this issue using South African data, by applying the structural bivariate vector autoregressive (VAR) methodology proposed by King and Watson (1997). Our empirical results provide considerable support of the view that, in the long run real stock prices are invariant to permanent changes in the rate of inflation. The impulse responses reveal a positive real stock price response to a permanent inflation shock in the long run, indicating that any deviations in short run real stock prices will be corrected towards the long run value. It is therefore concluded that inflation does not lower the real value of stocks in South Africa, at least in the long run.
South African stock return predictability in the context of data mining : the role of financial variables and international stock returns
(University of Pretoria, Department of Economics, 2010-12) rangan.gupta@up.ac.za; Gupta, Rangan; Modise, Mampho P.
In this paper, we examine the predictive ability, both in-sample and the out-of-sample, for South African stock returns using a number of financial variables, based on monthly data with an in-sample period covering 1990:01 to 1996:12 and the out-of-sample period of 1997:01 to 2010:04. We use the t-statistic corresponding to the slope coefficient in a predictive regression model for in-sample predictions, while for the out-of-sample, the MSE-F and the ENC-NEW tests statistics with good power properties were utilised. To guard against data mining, a bootstrap procedure was employed for calculating the critical values of both the in-sample and out-of-sample test statistics. Furthermore, we use a procedure that combines general-to-specific model selection with out-of-sample tests of predictive ability to analyse the predictive power of each financial variable. Our results show that, for the in-sample test statistic, only the stock returns for our major trading partners have predictive power at certain short and long run horizons. For the out-of sample tests, the Treasury bill rate and the term spread together with the stock returns for our major trading partners show predictive power both at short and long run horizons. When accounting for data mining, the maximal out-of-sample test statistics become insignificant from 6-months onward suggesting that the evidence of the out-of sample predictability at longer horizons is due to data mining. The general-to-specific model shows that valuation ratios contain very useful information that explains the behaviour of stock returns, despite their inability to predict stock return at any horizon.
Fiscal regime changes and the sustainability of fiscal imbalance in South Africa : a smooth transition error-correction approach
(University of Pretoria, Department of Economics, 2010-10) Schoeman, N.J. (Nicolaas Johannes); Niek.Schoeman@up.ac.za; Jibao, Samuel Sangawulo; Naraidoo, Ruthira
In addition to the conventional linear cointegration test, this paper tests the asymmetry relationship between revenue and expenditure i.e. making a distinction between the adjustment of positive (budget surplus) and negative (budget deficit) deviations from equilibrium using quarterly data on South Africa. The paper reveals that government authorities in South Africa are more likely to react faster when the budget is in deficit than when in surplus and that the stabilisation measures by government are fairly neutral at low deficit levels, that is, at quarterly deficit levels of 4% of GDP and below. We conclude that the attempt to achieve fiscal sustainability via a reduction in expenditure on sectors conducive to economic growth might be prone to social and politically shocks which could render such fiscal policy unsustainable. In South Africa the main fiscal challenge, therefore, is to find ways through which the recent gains in fiscal solvency can be consolidated. The increasing tension amongst local communities complaining about poor service delivery by the government could be a recipe for fiscal unsustainability.
Mobilising tax revenue to finance development : the case of property taxation in francophone Africa
(University of Pretoria, Department of Economics, 2010-11) nara.monkam@up.ac.za; Monkam, Nara F.
In the context of a widespread focus on decentralisation in Africa, there has been an imperative to find suitable ways to maximise potential own revenue sources at all sub-national government levels. This need in particular and the need for greater domestic resource mobilisation by African states in general have been exacerbated by the current global financial crisis that has led many countries into recession and left developed and developing countries alike scrambling to find solutions at home. Indeed, greater domestic resource mobilisation will go a long way toward providing African countries with the means to finance their development agenda without relying excessively on external assistance.
Defining the tax revenue base for individuals in the South African economy using a micro-simulating tax model
(University of Pretoria, Department of Economics, 2010-10) Schoeman, N.J. (Nicolaas Johannes); Van Heerden, Yolande; Niek.Schoeman@up.ac.za
The use of micro-simulation tax modelling techniques is reasonably well-documented in a broad spectrum of literature in the field of public economics. This article is primarily concerned with assessing the revenue base for individuals by means of such a micro-simulation tax model, using the 2005/2006 Income and Expenditure survey. The challenge was to structure the model in such a way that differences in individual behaviour, the economic environment and the income levels of individuals be captured to reflect the true national economy. The model developed is an extension of the MS model framework as structured by Thompson and Schoeman (2006) as well as Wilkinson (2009). It is different though in the sense that StatsSa data is aligned with published data from the South African Revenue Services (SARS). Given the scarcity of data (limited surveys) this model is a static model assuming that the population characteristics do not change significantly over the period of the analysis and that it remains useful in the short term. The structured model applies a tax calculator to compute the tax liability for each individual under the 2005/2006 tax regulations and rules. The results based on IES data is then benchmarked against the latest available published SARS data in the bulletin Tax Statistics (2009) and the relevant data in the latest (2010) publication Budget Review from the National Treasury. An analysis based on unadjusted data from the IES shows a substantial difference in tax liability compared to official tax figures published by SARS (R65 billion compared to the SARS figure of R101 billion for the 2005/06 IES survey3 year). After benchmarking critical values and the imputation of missing data the numbers are now much closer (R105 billion compared to the SARS R101 billion). The analysis is concluded with some policy scenarios showing the impact of a change in marginal tax rates and the tax threshold. The results highlight the sensitivity of high income earners to changes in tax policy.
Nonlinear tax elasticities and their implications for the structural balance
(University of Pretoria, Department of Economics, 2010-10) Ruthira.Naraidoo@up.ac.za; Jooste, Charl; Naraidoo, Ruthira
Research on tax elasticities in South Africa mainly employs linear models and shows that taxes evolve symmetrically irrespective of the economic cycle. This study extends this research to show that taxes behave asymmetrically and nonlinearly during expansions and contractions. Estimated linear elasticities imply that a one percent expansion in the cycle increases personal income tax, corporate income tax and value added tax by 1.43, 2.52 and 0.99 percent, respectively. However, estimated nonlinear elasticities are significantly different. During an expansion, the above elasticities increase by 1.89, 2.76 and 2.17 percent, respectively while during a contraction phase these elasticities increase by 0.89, 0.88 and 0.82 respectively. This finding of low tax collection during economic contractions has important implications for fiscal sustainability and overall fiscal prudence in South Africa. The findings of high tax elasticities during expansions might explain the underestimation of revenue by the government.
Fractional multinomial response models with an application to expenditure shares
(University of Pretoria, Department of Economics, 2010-10) Koch, Steven F.
The research presented here considers the performance of the Fractional Multinomial Logit (FMNL) model in explaining expenditure shares using data from the 2005/06 South African Income and Expenditure Survey. The results suggest that the FMNL performs favourably, when the dataset is large enough, but that it does not perform as well, when the dataset is limited. Expenditure elasticities were also estimated, and compared to the expenditure shares from a QUAIDS model. The resulting expenditure shares are fairly similar across model specification; however, the FMNL model does incorporate additional curvature, which is easily observed when comparing the QUAIDS elasticities to the FMNL elasticities.
Forecasting key macroeconomic variables of the South African economy : a small open economy New Keyenesian DSGE-VAR model
(University of Pretoria, Department of Economics, 2010-09) Steinbach, Rudi; Rangan.Gupta@up.ac.za; Gupta, Rangan
The paper develops a Small Open Economy New Keynesian DSGE-VAR (SOENKDSGEVAR) model of the South African economy, characterised by incomplete pass-through of exchange rate changes, external habit formation, partial indexation of domestic prices and wages to past inflation, and staggered price and wage setting. The model is estimated using Bayesian techniques on data for South Africa and the United States (US) from the period 1990Q1 to 2003Q2, and then used to forecast output growth, inflation and a measure of nominal short-term interest rate for one- to eight-quarters-ahead over an out-of-sample horizon of 2003Q3 to 2008Q4. The forecast performance of the SOENKDSGEVAR model is then compared with an independently estimated DSGE model, the classical VAR and BVAR models, with the latter being estimated based on six alternative priors, namely, Non-Informative and Informative Natural Conjugate priors, the Minnesota prior, Independent Normal-Wishart Prior, Stochastic Search Variable Selection (SSVS) prior on VAR coefficients and SSVS prior on both VAR coefficients and error covariance. Overall, we can draw the following conclusions: First, barring the BVAR model based on the SSVS prior on both VAR coefficients and the error covariance, the SOENKDSGE-VAR model is found to perform competitively, if not, better than all the other VAR models for most of the one- to eight-quarters-ahead forecasts. Second, there is no significant gain in forecasting performance by moving to a DSGE-VAR framework when compared to an independently estimated SOENKDSGE model. Finally, there is overwhelming evidence that the BVAR model based on the SSVS prior on both VAR coefficients and the error covariance is the best-suited model in forecasting the three variables of interest.
Semiparametric stochastic frontier analysis of specialist surgeon clinics
(University of Pretoria, Department of Economics, 2010-09) Koch, Steven F.; Slabbert, Jean D.
A purposive sample of South African specialist surgeons was used to nonparametrically estimate production relations for single output and multiple output production processes. The analysis was further extended to incorporate parametric assumptions associated with stochastic frontier analysis to provide estimates of technical efficiency within surgical practices. The results point to high levels of , as well as consistency between single output and multiple output models.
Forecasting Nevada gross gaming revenue and taxable sales using coincident and leading employment indexes
(University of Pretoria, Department of Economics, 2010-07) Majumdar, Anandamayee; Miller, Stephen M.; Balcilar, Mehmet; Gupta, Rangan
This paper provides out-of-sample forecasts of Nevada gross gaming revenue and taxable sales using a battery of linear and non-linear forecasting models and univariate and multivariate techniques. The linear models include vector autoregressive and vector error-correction models with and without Bayesian priors. The non-linear models include non-parametric and semiparametric models, smooth transition autoregressive models and artificial neural network autoregressive models. In addition to gross gaming revenue and taxable sales, we employ recently constructed coincident and leading employment indexes for Nevada’s economy. We conclude that non-linear models generally outperform linear models in forecasting future movements in gross gaming revenue and taxable sales.
Bubbles in South African house prices and their impact on consumption
(University of Pretoria, Department of Economics, 2010-07) Das, Sonali; rangan.gupta@up.ac.za; Gupta, Rangan; Kanda, Patrick T.
This paper tests for house price bubbles in the South African housing market, using quarterly data from 1969:Q2 to 2009:Q3, based on the unit root test developed by Phillips et al. (2010). This test allows us to detect whether a bubble exists or not, as well as the date of emergence and collapse of the same. Our findings show evidence of house price bubbles in the large, medium and small-middle segments, as well as, the aggregate middle-segment of the South African housing market. There is however, no evidence of bubbles in the luxury and a affordable segments of the market. Next we estimate an Error Correction Model (ECM) to investigate the existence of spillover effects from the housing sector onto consumption. Results indicate significant spillovers, though there is no evidence of the effect being higher during the bubble period. Finally, we disentangle the effects of the house price acceleration and deceleration on consumption in an effort to investigate whether or not consumption reacts asymmetrically to movements in house prices. We find that consumption responds significantly to the house price acceleration but not to deceleration, with this effect also not showing any evidence of being higher during the identified bubble period. The asymmetric model is found to perform better both in terms of in-sample and out-of-sample performances, relative to the symmetric model. The fact that we do not observe consumption to be more responsive to house price acceleration (deceleration) during the bubble period is most likely due two reasons: First, the National Credit Act number 34 implemented in 2005, which enforced responsible granting and use of credit and prohibited reckless awarding of credits (NCA, 2006) and second, the findings of recent studies depicting evidence of pronounced discretionary changes by the South African Reserve Bank to counter the recent adverse movements in the financial markets.
Valuation ratios and stock price predictability in South Africa : is it there?
(University of Pretoria, Department of Economics, 2010-07) rangan.gupta@up.ac.za; Gupta, Rangan; Modise, Mampho P.
Using monthly South African data for 1990:01-2009:10, this paper, to the best of our knowledge, is the first to examine the predictability of real stock prices based on valuation ratios, namely, price-dividend and price-earnings ratios. We cannot detect either short-horizon or long-horizon predictability; that is, the hypothesis that the current value of a valuation ratio is uncorrelated with future stock price changes cannot be rejected at both short- and long- horizons based on bootstrapped critical values constructed from linear representations of the data. We find, via Monte Carlo simulations, that the power to detect predictability in finite samples tends to decrease at long horizons in a linear framework. Though Monte Carlo simulations applied to exponential smooth-transition autoregressive (ESTAR) models of the price-dividend and price-earnings ratios, show increased power, the ability of the non-linear framework in explaining the pattern of stock price predictability in the data does not show any promise both at short- and long-horizons, just as in the linear predictive regressions.
The impact of the international economic crisis on child poverty in South Africa
(University of Pretoria, Department of Economics, 2010-06) Decaluwe, Bernard; Mabugu, Ramos; Maisonnave, Helene; Robichaud, Veronique; Shepherd, Debra; Van der Berg, Servaas; Von Fintel, Dieter; Chitiga-Mabugu, Margaret
This paper reports on a study to provide insights into the magnitude of the shocks associated with the recent global economic crisis in macroeconomic terms in South Africa, the country’s capacity to withstand or cushion these shocks, and the extent of fragility in terms of poverty levels and child wellbeing. The analysis combines macroeconomic and micro-economic tools to assess the extent of the crisis’ impact on the country. The study finds that the poverty headcount ratio increases little in the moderate crisis scenario, but substantially under the severe scenario. However, under both scenarios there is a relatively successful return to close to the business as usual trend. It is important to note though that under both scenarios, more poverty sensitive measures (the poverty gap ratio and the poverty severity ratio) decline more, and remain in negative territory longer, showing that the major impact of the crisis is on the poorest, and that this impact is most difficult to overcome.
The use of a Marshallian Macroeconomic Model for policy evaluation : case of South Africa
(University of Pretoria, Department of Economics, 2010-06) Zellner, Arnold; Ngoie, Jacques Kibambe
Using a disaggregated Marshallian Macroeconomic Model (MMM-DA), this paper investigates how the adoption of a set of 'free market reforms' may affect the economic growth rate of South Africa. Accounting for possible side effects mainly on the budget deficit, our findings suggest that the institution of the proposed policy reforms would yield a substantial growth in the aggregate annual real GDP. The resulting GDP growth rate could range from 5.3 percent to 9.8 percent depending on which variant of the reform policies is implemented.
Inflation and economic growth in Latin America : some panel time-series evidence
(University of Pretoria, Department of Economics, 2010-04) manoel.bittencourt@up.ac.za; Bittencourt, Manoel
In this paper we investigate the role of poor macroeconomic performance, in terms of high rates of inflation, in determining economic growth in four Latin American countries between 1970 and 2007. The empirical results, based on the relatively novel panel time-series analysis, confirm the anecdotal evidence which suggests that inflation has had a detrimental effect to growth in the region. All in all, we highlight the costs that inflation has had on economic activity, and also the importance of particular economic institutions which were implemented in the 1990s central-bank independence and fiscal responsibilities laws in actually keeping inflation under control in the region, as a first step in the direction of sustained growth and prosperity.
Financial development and economic growth in Latin America : Schumpeter is right!
(University of Pretoria, Department of Economics, 2010-06) manoel.bittencourt@up.ac.za; Bittencourt, Manoel
In this paper we investigate the role of financial development, or more wide-spread access to finance, in generating economic growth in four Latin American countries between 1980 and 2007. The results, based on the relatively novel panel time-series analysis, confirm the Schumpeterian prediction which suggests that finance authorises the entrepreneur to invest in productive activities, and therefore to promote economic growth. Furthermore, given the characteristics of the sample of countries chosen, we also highlight the importance of macro-economic stability, and all the institutional framework that it encompasses, as a necessary condition for financial development, and consequently for growth and prosperity in the region.
The impact of the global economic crisis on sub-national government – lessons from the Free State Province in South Africa
(University of Pretoria, Department of Economics, 2010-06) Maisonnave, Helene; Mahabir, Jugal; Mabugu, Ramos; margaret.chitiga@up.ac.za; Chitiga-Mabugu, Margaret
A provincial computable general equilibrium model for the Free State province in South Africa is used to quantify the channels by which the recent global economic crisis affects the province. The analysis allows focus on three levels through which provincial economies and their people are impacted by a global economic crisis, namely the macro-economic level, the meso-economic level and the micro-economic level. The novel features of the paper are mainly applying this methodology at sub national government level. The decrease in world prices combined with the drop in world demand lead to a fall in production for most sectors in the province. There is a negative impact on institutions, and households see their incomes drop. Though the crisis seems to be petering out now, there are lessons for intergovernmental financial relations that this paper has highlighted and long run effects of the crisis that the province needs to confront.
Financial market liberalization, monetary policy and housing price dynamics
(University of Pretoria, Department of Economics, 2010-03) Miller, Stephen M.; Van Wyk, Dylan; Gupta, Rangan
This paper considers how monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector and whether the financial market liberalization of the early 1980’s influenced those dynamics. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model over the periods 1968:01 to 1982:12 and 1989:01 to 2003:12, including 21 housing-sector variables at the national and four census regions. Overall, the 100 basis point Federal funds rate shock produces larger effects on the real house prices, both at the regional level and the national level, in the post-liberalization period when compared to the pre-liberalization era. While the precision of the estimates do not imply significant differences, the finding does offer a caution. That is, the housing market appears more sensitive to monetary policy shocks in the post-liberalization period. On the one hand, this suggests that monetary policy possesses increased leverage. On the other hand, the housing market cycle traditionally contributes an important component to the aggregate business cycle. Thus, the monetary authorities may need to exercise more care in implementing Federal funds rate adjustments going forward. In addition, contractionary monetary policy exerts a negative effect on house prices at the national level, indicating the absence of the price puzzle in small structural vector autoregressive models. The puzzle’s absence in the housing sector possibly emerges as a result of proper identification of monetary policy shocks within a data-rich environment. Finally, we find that the reaction of housing sector proves heterogeneous across regions, with the housing sector in the South driving the national data after liberalization, while before liberalization, the Middle West appears to drive the housing market. The responses in the West differ the most from the other regions.

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