Essays on commodity prices and financial market variables evidence from Sub Saharan Africa

• Main Author: Ndlovu, Xolani
• Format: Others
• Language: en
• Published: 2019
• Online Access: https://hdl.handle.net/10539/26262

Wits business school in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Finance === Volatility in international commodity prices is almost accepted as a stylised fact in modern financial markets. The drivers of commodity prices have evolved in addition to traditional global demand and supply factors. The literature suggests a number of other drivers, among them, activities of speculators – the so called “financialisation” of commodities postulate, the role of China and Fed policy. The question of whether exogenous shocks to commodity prices are transmitted through financial markets in Africa is investigated. In addition, the hypothesis of “wealth-transfer” from exporters to importers of commodities when prices fall is tested. Further, commodity prices are tested for their in sample and out of sample predictive ability. Finally recommendations are made for policy makers and financial market players in frontier markets in Africa. The three essays are organised in Chapters 3 to 5 of the study. In Chapter 3, an ARDL bounds testing approach is adopted and we find that a South Africa-specific commodity index significantly predicts (in-sample) the exchange rate in the short-run. While the long-run relationship is weak and the associated error correction process is slow existence of cointegration of commodity prices and the exchange rate suggests that commodities explain a significant part of terms of trade fluctuations for South Africa. With respect to the structural exchange rate models of the South African Rand, using the Dynamic Ordinary Least squares (DOLS) estimator, we find that commodity prices are significant and consistent explanatory variables of the changes in the nominal exchange rate. The commodity price variable improves the in-sample fit of the structural exchange rate models presented in this chapter and this evidence is robust to the other major Rand cross rates. Further, inclusion of the commodity price variable improves the out-of-sample short horizon forecasting ability of canonical exchange rate models. 2 In Chapter 4 we employ dynamic econometric modelling techniques to confirm the existence of a strong financial channel through which copper price shocks are transmitted to the Zambian economy. In the short run, changes in the copper price lead changes in all financial market variables. Financial market variables and the price of copper share a long-run equilibrium relationship. Importantly, if this system is out of its long-run equilibrium, short run corrections back to equilibrium are made by adjustments to the short term interest rate. Fittingly, the copper price-interest rate relationship appears strong in the long run. This result suggests that the policy makers “over-rely” on monetary policy to accommodate shocks from the international price of copper. The exchange rate and equity prices appear weakly exogenous to the system in-sample and out of sample. In Chapter 5, we confirm existence of a structural break in the price of oil in July 2008. We also show that the financial market time series for Kenya and Nigeria also exhibit a significant structural break around this period. We therefore partitioned our sample to investigate the effect of structural shocks to the financial markets of the two markets. On the whole, we find that the nexus between financial markets and oil prices is much stronger and statistically significant for an oil exporter (Nigeria) and weaker and statistically insignificant for a net oil importer (Kenya) after the 2008 financial crisis. Prior to the 2008 oil price shock, the results are roughly the opposite of the post oil shock period for both countries. Our results highlight that it is important to account for major structural shifts in modelling the impact of oil prices in developing countries (Le and Chang, 2011). The “wealth transfer” argument from net importer to net-exporters exists between Kenya and Nigeria in the short run although it is not robust to sample specification. Finally, we highlight the inherent flaws and limitations of ex-post stabilisation funds in Africa and make a case for market based oil-price hedging instruments. We argue for the adoption of market based hedging instruments given 3 the promising growth in financial markets of developing African countries in spite of several thorny implementation difficulties. === GR2019