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Article
Publication date: 7 October 2021

Moses Nzuki Nyangu, Freshia Wangari Waweru and Nyankomo Marwa

This paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.

Abstract

Purpose

This paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.

Design/methodology/approach

Symmetric and asymmetric error correction models (ECMs) are employed to test the pass-through effect and adjustment speed of deposit rates when above or below their equilibrium levels.

Findings

The findings reveal an incomplete pass-through effect in both the short run and long run while mixed results of symmetric and asymmetric adjustment speed across the different deposit rate categories are observed. Collusive pricing arrangement behavior is supported by deposit rate categories that adjust more rigidly upwards than downwards, while negative customer reaction behavior is supported by deposit rate categories that adjust more rigidly downwards than upwards.

Practical implications

Even though the findings indicate an aspect of increased responsiveness over the period, the sluggish adjustment of deposit rates imply that monetary policy is still ineffective and not uniform across the different deposit rate categories.

Originality/value

To the best of the authors' knowledge, this is the first study to empirically examine both symmetric and asymmetric adjustment behavior of deposit interest rate categories in Kenya. The findings are key to policy makers as they provide insights on how long it takes to adjust different deposit rate categories to monetary policy decisions. In addition, the behavior of deposit rates partly explains why interest rates capping was imposed in Kenya in 2016.

Details

International Journal of Emerging Markets, vol. 18 no. 9
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 18 February 2021

Javed Ahmad Bhat and Sajad Ahmad Bhat

This paper attempts to examine the transmission of exchange rate changes into the domestic prices together with other important determinants of later, in case of a developing…

Abstract

Purpose

This paper attempts to examine the transmission of exchange rate changes into the domestic prices together with other important determinants of later, in case of a developing country, namely, India.

Design/methodology/approach

In an open economy Philips curve framework, a symmetric model developed by Pesaran et al. (2001) together with a complete asymmetric model developed by Shin et al. (2014) has been applied to assess the transmission of exchange rate changes into the domestic prices (inflation) of India. In addition, non-linear cumulative dynamic multipliers are used to portray the route between disequilibrium position of short run and new long-run equilibrium of the system. The multipliers highlight the asymmetric adjustment paths and/or duration of disequilibrium and therefore add valuable information to the long and short-run asymmetry.

Findings

In symmetric framework, exchange rate pass-through is reported to be incomplete and short-run pass through is found to be lower than the long-run pass through. A contractionary monetary policy stance is observed to decrease inflation in the long-run only and in the short-run, a case for price puzzle is observed, although the coefficient is statistically insignificant. Similarly, the impact of output growth is positive in both the short and long-run and both the coefficients are statically significant. Finally, the oil price inflation is also found to escalate the domestic inflationary pressures in both the short and long run, although the pass-through transmission is lower in the short-run than in the long-run. In case of an asymmetric setting, evidence in favour of directional asymmetry is reported whereby long-run impact of currency appreciation is found to be higher than depreciation. Similarly, a contractionary monetary policy action lowers the inflation, the easy one increases it; however, the impact of both the positive and negative changes in interest rate is found to be symmetric. An increase in GR is found to increase the inflation by a relatively appreciable magnitude than is observed when the fall in GR is reported. The possible reason for this asymmetric response of inflation may be explained in terms of asymmetric behaviour of demand conditions during economic upturns and downturns and downward inflexibility of prices. Finally, the transmission of oil price inflation to domestic inflation is also found to be asymmetric. An increase in oil price inflation leads to an increase in domestic inflation by a higher magnitude. whereas a decrease in it lowers inflation only marginally.

Practical implications

From a policy perspective, it is certainly important for the central banks to monitor the exchange rate changes so as to design the appropriate policy actions to resist any inflationary pressures resulting from the external sector. More importantly, a gauge on the factors that lead to destabilizing exchange rate movements or large currency price fluctuations is highly warranted. The results also highlight the relevance of proper domestic demand management and lowering dependence on oil imports to avoid the unnecessary inflation pressures in the economy.

Originality/value

While some studies have explored the possibilities of asymmetric interactions in the case of India, however, these studies have considered only the partial asymmetric model specifications and have not included a well-established theoretical base to include the other potential determinants of inflation as well. In this regard, the authors applied a complete asymmetric model specification developed by Shin et al. (2014) in an open economy Philips curve framework to assess the transmission of exchange rate changes into the domestic prices (inflation) of India. This paper will enrich the existing literature from a viewpoint of a comprehensive analysis of exchange rate pass-through by taking note of potential asymmetries coupled with other important determinants of inflation.

Details

International Journal of Emerging Markets, vol. 17 no. 8
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 9 September 2014

Gideon Fadiran

– The purpose of this paper is to examine and compare the interest rate pass-through among the Brazil, Russia, India, China and South Africa (BRICS) emerging markets.

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Abstract

Purpose

The purpose of this paper is to examine and compare the interest rate pass-through among the Brazil, Russia, India, China and South Africa (BRICS) emerging markets.

Design/methodology/approach

The paper reviews a general literature on interest rates pass-through by applying a cointegration and asymmetric mean adjustment lag (MAL) error correction methodology (ECM).

Findings

A symmetric adjustment is found in Russia, China and South Africa's deposit rate, while an asymmetric adjustment is found in Brazil and India's deposit rate adjustments. The presence of a customer reaction theory is found in Brazil, India, China and South Africa's deposit rate adjustments, while a collusive pricing arrangement is found in Russia. From the lending rate adjustment, a collusive pricing arrangement was found in Brazil, China and South Africa, while a customer reaction theory was found in India and Russia.

Research limitations/implications

The sample period used in the study covers a period starting from the formal recognition of BRIC (2001-2010), which limits the data length.

Practical implications

The research output and implication can assist monetary policy makers, investors and consumers to monitor BRICS’ central banking, commercial banking and competition behaviour, individually and as a group. The BRICS are potentially heading towards a more financially integrated bloc as multilateral agreements among members increases. This is in the form of Letters of Credit and Memorandum of Understanding. These agreements should boost intra-BRICS financial transactions, investments and trade.

Originality/value

This is, to the best of knowledge, the first analysis of BRICS interest rate pass-through using the asymmetric MAL ECM application.

Details

International Journal of Emerging Markets, vol. 9 no. 4
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 12 January 2015

Wisdom Dube and Andrew Phiri

– The purpose of this paper is to examine asymmetric co-integration effects between nutrition and economic growth for annual South African data from the period 1961-2013.

Abstract

Purpose

The purpose of this paper is to examine asymmetric co-integration effects between nutrition and economic growth for annual South African data from the period 1961-2013.

Design/methodology/approach

The authors deviate from the conventional assumption of linear co-integration and pragmatically incorporate asymmetric effects in the framework through a fusion of the momentum threshold autoregressive and threshold error correction (MTAR-TEC) model approaches, which essentially combines the adjustment asymmetry model of Enders and Silkos (2001); with causality analysis as introduced by Granger (1969); all encompassed by/within the threshold autoregressive (TAR) framework, a la Hansen (2000).

Findings

The findings obtained from the study uncover a number of interesting phenomena for the South Africa economy. First, in coherence with previous studies conducted for developing economies, the authors establish a positive relationship between nutrition and economic growth with an estimated income elasticity of nutritional intake of 0.15. Second, the authors find bi-direction causality between nutrition and economic growth with a stronger causal effect running from nutrition to economic growth. Lastly, the authors find that in the face of equilibrium shocks to the variables, policymakers are slow to responding to deviations of the variables from their co-integrated long run steady state equilibrium.

Originality/value

In the study, the authors make a novel contribution to the literature by exploring asymmetric modelling in the correlation between nutrition intake and economic growth for the exclusive case of South Africa.

Details

Journal of Economic Studies, vol. 42 no. 1
Type: Research Article
ISSN: 0144-3585

Keywords

Abstract

Details

Review of Marketing Research
Type: Book
ISBN: 978-0-85724-728-5

Article
Publication date: 9 November 2015

Mahmoud Qadan and Joseph Yagil

The recent economic crises have attracted attention to the issue of international equity co-movements and correlations. Using data from 1980 to 2010, the authors examine the…

Abstract

Purpose

The recent economic crises have attracted attention to the issue of international equity co-movements and correlations. Using data from 1980 to 2010, the authors examine the international co-movements of both real economic activity, as reflected in industrial production and the gross domestic product (GDP), and financial activity, as reflected in equity market returns. While classic symmetric co-integration tests do not reject the hypothesis of no co-integration, the authors find evidence of asymmetric co-integration in these three variables between the USA and the rest of the Group of Seven (G7) countries. The momentum threshold autoregressive (M-TAR) model captures the nature of the asymmetry most effectively and is the most applicable model for adjustment to long-term equilibrium. This model suggests that the path of adjustment to long-run equilibrium is somewhat different when the price differential is decreasing than when it is increasing. These findings imply that the benefits of asset diversification for investors with a long horizon might be limited in scope.

Design/methodology/approach

This work is based on the theory of integrated time series. The authors use symmetric and asymmetric co-integration tests to market indices, as well as to monthly industrial production statistics and quarterly data about the GDP. In line with the financial economic literature, the authors select the GDP as a proxy that reflects the real economy and share prices to mirror the financial sector of the economy. Because no monthly data exist about GDP, the authors use instead the industrial production. Both variables cover the period from January 1980 to June 2010.

Findings

The overall findings demonstrate that the USA and the rest of the G7 countries are not symmetrically co-integrated with respect to the GDP. Indeed, they are asymmetrically co-integrated. These findings may explain the additional important result that the majority of equity markets are also asymmetrically co-integrated with the USA.

Research limitations/implications

The co-movements of the equity markets and real economic activity imply that the benefits of asset diversification for investors with a long horizon might be limited in scope. In the short run, however, portfolio diversification can be more beneficial due to the short-term fluctuations that may derive from the asymmetric correction process.

Originality/value

Prior research on co-movements has focused mainly on studying the correlations among international equity markets by analyzing conditional correlations or using symmetric co-integration methods; the authors test the existence of a long-term relationship between economic variables with respect to the USA and the rest of the G7 countries using a threshold co-integration model.

Details

Review of Accounting and Finance, vol. 14 no. 4
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 20 February 2007

Gregory Koutmos and George C. Philippatos

This paper seeks to test the hypothesis that stock returns in the Athens Stock Exchange (ASE) adjust asymmetrically to past information due to differential adjustment costs.

2259

Abstract

Purpose

This paper seeks to test the hypothesis that stock returns in the Athens Stock Exchange (ASE) adjust asymmetrically to past information due to differential adjustment costs.

Design/methodology/approach

The methodological approach is based on the asymmetric price adjustment model suggested by Koutmos. The model is estimated using daily sector stock return data for the ASE over the period 2 January 1992‐1 March 1999.

Findings

The empirical evidence suggests that prices respond asymmetrically to past information. Specifically, positive past returns are more persistent than negative past returns of an equal magnitude. This behavior is consistent with an asymmetric partial adjustment price model where news suggesting overpricing (negative returns) are incorporated faster into current market prices than news suggesting underpricing (positive returns).

Research limitations/implications

This paper does not investigate the possibility that the asymmetric price adjustment is related to conditional heteroscedasticity in stock return. Further research in this area should prove very useful.

Practical implications

The findings in this paper have important theoretical and practical implications. On the theoretical level the findings suggest that violations of the efficient markets hypothesis could be due to market frictions and costly adjustments. On the practical level, the asymmetric adjustment process could improve trading profits, especially those based on momentum strategies.

Originality/value

This paper presents new findings on the stock price dynamics of the ASE. These findings should be of interest to researchers, regulators and market participants.

Details

Managerial Finance, vol. 33 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 25 March 2022

Oliver E. Ogbonna and Hyacinth E. Ichoku

The experience of rising trade imbalance between Nigeria and its key trading partners in recent years motivated this study. Previous studies on this issue either ignored bilateral…

Abstract

Purpose

The experience of rising trade imbalance between Nigeria and its key trading partners in recent years motivated this study. Previous studies on this issue either ignored bilateral level or assumed that the effect of crude oil price and/or exchange rate changes on trade balance is symmetric. Consequently, this study investigates whether Nigeria's bilateral trade balance with Belgium, China, United Kingdom (UK) and USA is responding symmetrically or asymmetrically to changes in oil price and exchange rate.

Design/methodology/approach

The authors used nonlinear autoregressive-distributed lag (NARDL) model that decomposed oil price and exchange rate into partial sum processes of positive and negative changes over the period 1999Q1–2019Q4.

Findings

The study finds that the effects of oil price hike and plunge asymmetrically influence Nigeria's trade balance with the UK and USA. Further evidence indicated that oil price plunge exerts greater influence than price hike in all the cases, except the UK in the long run. Furthermore, Nigeria's trade balance responds asymmetrically and significantly to changes in exchange rate with China in the long run and with China and the UK in the short run. Specifically, the depreciation effect is more prominent than appreciation.

Originality/value

Significant contributions to the existing literature in Nigeria include the recognition that the effects of oil price and exchange rate changes on trade are asymmetric and the disaggregation of trade into bilateral level to identify country-specific effect.

Details

Journal of Economic Studies, vol. 50 no. 3
Type: Research Article
ISSN: 0144-3585

Keywords

Open Access
Article
Publication date: 9 November 2018

Monsurat Ayojimi Salami and Razali Haron

The purpose of this paper is to examine the pricing efficiency of the Malaysian crude palm oil (CPO) market before and after the structural break. This study uses the daily…

3501

Abstract

Purpose

The purpose of this paper is to examine the pricing efficiency of the Malaysian crude palm oil (CPO) market before and after the structural break. This study uses the daily closing price of CPO and CPO futures (CPO-F) for the period ranging from June 2009 to August 2016 while taking structural breaks into account.

Design/methodology/approach

In this study, symmetric and asymmetric long-run relationship model are employed, such as the Johansen cointegration, VECM, TAR and M-TAR models, to examine the impact of structural breaks on the pricing efficiency of the Malaysian CPO market.

Findings

This finding establish that Malaysian CPO price is efficient before and after the structural break. The consistent efficiency of the Malaysian CPO market supports the trading of the CPO-F in Globex and the use of Malaysian CPO pricing as the reference price. This study establishes that a structural break in the Malaysian CPO price series does not affect the pricing efficiency of the market.

Research limitations/implications

This study shows that using Malaysian CPO price as a reference price is sustainable even in the event of a structural break. Therefore, market participants in the Malaysian CPO market have less to worry about the CPO price as it supports the weak form of efficiency. Price deviation in the short run may not lead to arbitrage profit as transaction cost may not be covered.

Practical implications

This study implies that if there is distortion in the price due to shocks, both manufacturers and producers need to hedge their positions in the futures market (subject to their positions in the underlying market). By entering into the futures market, pricing is locked in advance; hence, price risk is eliminated. Such a distortion could also affect the efficiency of the CPO price, therefore this study also addresses the issue of efficiency of the local CPO market.

Originality/value

Previous studies on Malaysian CPO pricing efficiency did not take the effect of structural break into consideration, making it difficult for these studies to show consistency in the efficiency of the Malaysian CPO market.

Details

Journal of Capital Markets Studies, vol. 2 no. 2
Type: Research Article
ISSN: 2514-4774

Keywords

Article
Publication date: 18 August 2023

Ridha Esghaier

This paper aims to test the empirical validity of the dynamic trade-off theory in its symmetric and asymmetric versions in explaining the capital structure of a panel of publicly…

Abstract

Purpose

This paper aims to test the empirical validity of the dynamic trade-off theory in its symmetric and asymmetric versions in explaining the capital structure of a panel of publicly listed US industrial firms over the period from 2013 to 2019. It analyzes the existence of an adjustment of leverage toward its target level and whether the speed of this adjustment is influenced by the debt measure, the model specification or/and the fact that the actual debt ratio is higher or lower than its long-term target level.

Design/methodology/approach

This paper uses a quantitative research methodology using panel data analysis under the partial adjustment model and the error correction model using the generalized moment method in first differences and in systems to explore the dynamic nature of firms’ capital structure behavior.

Findings

The results show that the effects of the conventional determinants of leverage are globally consistent with the trade-off theory predictions. The dynamic versions confirm that firms exhibit leverage-targeting behavior. Although this speed of adjustment (SOA) depends on the debt and model specifications, it is around 60% on average. The estimated SOA is higher for the market leverage measure compared to the book leverage. The asymmetric adjustment model reveals that firms are more sensitive to reducing leverage than increasing it when they are away from their target; overleveraged firms exhibit approximately 5% faster adjustment than underleveraged firms when book leverage is used.

Originality/value

The originality of this research paper lies in its development and test of an asymmetric model to allow the leverage adjustment speed to vary depending on whether the firm’s debt ratio is above or below its target level and the methodological approach as well as the different model specifications used and the insights generated through the application of rigorous econometric techniques.

Details

Studies in Economics and Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1086-7376

Keywords

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