African Finance Journal - Special issue 1, January 2011
Volumes & issues
Special issue 1, January 2011
The use of the Merton model to quantify the default probabilities of the top 42 non-financial South African firmsSource: African Finance Journal 13, pp 1 –33 (2011)More Less
The objective of this paper is to quantify the default probabilities of the top 42 non-financial firms listed on the Johannesburg Stock Exchange. This paper follows the same methodology as outlined in the Moody's KMV white papers in implementing the Merton (1974) model. The model of default prediction builds upon option theory as pioneered by Black-Scholes-Merton and derives the probability of default predominately from asset value, asset volatility and a firm's leverage. The theoretical default probabilities of the top 42 listed non-financial firms are determined under base-case and worst-case scenarios and South African companies are generally found to have singularly low probabilities of default. This mainly reflects the low use of financial leverage by South African firms. This paper finds that there is weak correlation between Merton default probabilities and ratings issued by the rating agencies. The results of this paper indicate that the Merton (1974) model may, subject to limitations, be used as a source of information of the underlying credit risk of publicly traded firms in South Africa.
Source: African Finance Journal 13, pp 34 –52 (2011)More Less
Using monthly data from 1960 through to January 2010, this study employs the generalized autoregressive conditional heteroskedastic (GARCH) and GARCH-M (mean) methodologies to estimate the impact of Inflation Targeting (IT) on inflation uncertainty as well as to study whether an increase in inflation causes increased uncertainty and whether a rise in uncertainty causes higher inflation. Moreover the study assesses whether Inflation Targeting has influenced a decline in inflation persistence since its adoption. Due to structural breaks the study uses a shorter series and has found that Inflation Targeting has not been successful in reducing monthly inflation uncertainty. Given that uncertainty has been shown to impose real economic costs, the failure of IT to lower uncertainty as well as inflation persistence in South Africa gives a cautionary lesson for other emerging economies contemplating the adoption of an inflation targeting monetary policy framework.
Source: African Finance Journal 13, pp 53 –70 (2011)More Less
The causal relationship between world commodity prices and inflation has been investigated in numerous empirical studies with no clear cut consensus. The key issue in the debate is whether changes in commodity prices can be used to predict the future path of consumer prices. Using a Vector Error Correction Model (VECM), this study seeks to provide empirical evidence on the relevance of world commodity prices in predicting inflation focusing on Botswana, a small open economy that is heavily dependent on the import and export of primary commodities. The results revealed the existence of long run relationships between commodity prices indices and headline inflation in Botswana. The main implication of the findings of this study is that world commodity prices could play an informational role in the conduct of monetary policy in Botswana.
The impact of Black Economic Empowerment transactions on shareholder wealth and firm profitability : evidence from the JSESource: African Finance Journal 13, pp 71 –91 (2011)More Less
This study assesses the impact of Black Economic Empowerment announcements on short-term shareholder wealth and firm profitability on JSE listed firms. We find evidence that information about transactions is incorporated into the share price 20 days prior to the announcement day. However, cumulative abnormal returns for the entire period remain negative, indicating negative shareholder wealth effects. Surprisingly, investors tend to react more negatively to transaction announcements during bull market conditions, with daily average abnormal returns of -3.4%. We also document evidence that the listing age of a firm, the firm's growth prospects and overall market conditions are major determinants of short-term profitability.
Source: African Finance Journal 13, pp 92 –109 (2011)More Less
This paper examines the effectiveness of monetary policy communication in signalling the direction of short term interest rates in Kenya between January 2007 and January 2010. The analyses focused on monetary policy committee (MPC) press releases as the main channel of communicating policy decisions. The paper used an Exponential Generalized Autoregressive Conditional Heteroskedastic (EGARCH) model to analyse the effects of policy announcements on changes in average weekly interbank interest rates and the 91 day Treasury bill rates. The empirical findings show that, to a large extent, the monetary policy press releases have been effective in signalling the direction of short term interest rates. Nevertheless, there seems to be asymmetry in the effectiveness of the statements, in which statements with loose policy inclination tend to be more effective compared with the statements with tight policy inclination. Results also indicate that reinforcing the policy stance with statements in the intermeeting period such as the Governor's speeches also tend to have a signalling power particularly in instances when the MPC maintains a neutral stance.
Source: African Finance Journal 13, pp 110 –121 (2011)More Less
This paper investigates the transmission rate from exchange rate movement into import prices across product category in Ghana over the past ten years using quarterly data. Using the Autoregressive Distributed Lag approach to cointegration, the paper estimated the degree of pass-through to import price and found a decline in the pass-through elasticities. The results reveal that the transmission rate from exchange rate movement into import prices is incomplete in the short-run; in the long-run however, the pass-through elasticity is larger than the short-run.