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African countries are generally fragile. This and other related characteristics affect the potential for growth and development. The purpose of this paper is to investigate…
Abstract
Purpose
African countries are generally fragile. This and other related characteristics affect the potential for growth and development. The purpose of this paper is to investigate whether the effect of FDI on economic growth is contingent on a financial system that accounts for financial market fragility. An important point of departure from earlier studies is the adoption of a new measure of financial market fragility.
Design/methodology/approach
Given the uniqueness of the data set, the study uses a panel data and estimates an econometric model using an instrumental variable approach. For robustness purposes, a pooled ordinary least square is also estimated.
Findings
The study provides evidence that if the financial market is fragile as in the case of Africa, FDI inflows may have a marginally significant positive impact on economic growth. The findings suggest that fragility in the financial market is a key absorptive capacity and cannot be trivialised when exploring FDI–growth nexus in Africa.
Research limitations/implications
The uniqueness of the data set limited the time period of the study. Nonetheless, the findings are still crucial to policy makers in Africa and other developing countries with similar characteristics.
Originality/value
To the best of the authors’ knowledge, this is the first study in Africa to investigate the FDI–growth nexus which accounts for financial market fragility.
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Lindokuhle Talent Zungu and Lorraine Greyling
This study aims to test the validity of the Rajan theory in South Africa and other selected emerging markets (Chile, Peru and Brazil) during the period 1975–2019.
Abstract
Purpose
This study aims to test the validity of the Rajan theory in South Africa and other selected emerging markets (Chile, Peru and Brazil) during the period 1975–2019.
Design/methodology/approach
In this study, the researchers used time-series data to estimate a Bayesian Vector Autoregression (BVAR) model with hierarchical priors. The BVAR technique has the advantage of being able to accommodate a wide cross-section of variables without running out of degrees of freedom. It is also able to deal with dense parameterization by imposing structure on model coefficients via prior information and optimal choice of the degree of formativeness.
Findings
The results for all countries except Peru confirmed the Rajan hypotheses, indicating that inequality contributes to high indebtedness, resulting in financial fragility. However, for Peru, this study finds it contradicts the theory. This study controlled for monetary policy shock and found the results differing country-specific.
Originality/value
The findings suggest that an escalating level of inequality leads to financial fragility, which implies that policymakers ought to be cautious of excessive inequality when endeavouring to contain the risk of financial fragility, by implementing sound structural reform policies that aim to attract investments consistent with job creation, development and growth in these countries. Policymakers should also be cautious when implementing policy tools (redistributive policies, a sound monetary policy), as they seem to increase the risk of excessive credit growth and financial fragility, and they need to treat income inequality as an important factor relevant to macroeconomic aggregates and financial fragility.
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Aymen Ben Rejeb and Mongi Arfaoui
The purpose of this paper is to investigate whether Islamic stock indexes outperform conventional stock indexes, in terms of informational efficiency and risk, during the recent…
Abstract
Purpose
The purpose of this paper is to investigate whether Islamic stock indexes outperform conventional stock indexes, in terms of informational efficiency and risk, during the recent financial instability period.
Design/methodology/approach
The paper uses a state space model combined with a standard GARCH(1,1) specification while taking into account structural breakpoints. The authors allow for efficiency and volatility spillovers to be time-varying and consider break dates to locate periods of financial instability.
Findings
Empirical results show that Islamic stock indexes are more volatile than their conventional counterparts and are not totally immune to the global financial crisis. As regards of the informational efficiency, the results show that the Islamic stock indexes are more efficient than the conventional stock indexes.
Practical implications
Resulting evidence of this paper has several implications for international investors who wish to invest in Islamic and/or conventional stock markets. Policy makers and even academics and Sharias researchers should as well take preventive measures in order to ensure the stability of Islamic stock markets during turmoil periods. Overall, prudent risk management and precocious financial practices are relevant and crucial for both Islamic and conventional financial markets.
Originality/value
The originality of this study is performed by the use of time-varying models for volatility spillovers and informational efficiency. It considers structural break dates that think about the dynamic effect of informational flows on stock markets. The study was developed in a global framework using international data. The global analysis allows avoiding country specific effects.
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The current paper contributes to the vigorous debate about policies and regulations that would shield financial markets' participants from future events of the financial turmoil…
Abstract
Purpose
The current paper contributes to the vigorous debate about policies and regulations that would shield financial markets' participants from future events of the financial turmoil. In doing so, the paper aims to broaden the picture of the financial crisis contagion and set it against the background of contemporary European markets. The main purpose of this paper is to present novel aspects of the financial crisis contagion, hence clarifying the contagion theory that still remains confusing and ambiguous for both the academics and financial markets' practitioners.
Design/methodology/approach
The paper builds on a simulation model for the financial crisis contagion that is rooted in the qualitative query and backed by semi‐structured interviews with financial markets' participants who possess extensive knowledge about the functioning of European markets and their interconnectedness. With this in mind, the current paper adopts an international investor's perspective on implications that stem from the linkages between European financial markets, flawed regulations and the absence of cross‐border monitoring of the financial crisis contagion.
Findings
The findings constitute practical insights into the issues of the financial crisis contagion, hence providing useful advice on policies and regulations that could manage the cross‐market transmission of the financial turmoil and shield financial markets' participants from the episodes of financial crises in the future. The findings reported in this paper also present novel aspects of the contagion processes across the contemporary and systemically important financial markets in Europe.
Practical implications
The practical implications of the current paper gain in significance as the nascent financial crisis sparked off vigorous debate about the need for implementing regulations that would prevent financial markets' participants from the future episodes of global financial crises. At this point, the findings reported in the current paper might be of interest for policy makers and markets' authorities. In addition, the paper attempts to deliver findings that practitioners associated with the contemporary European financial markets would benefit from by understanding the linkages between these markets and ways the financial contagion spreads. Previously, little knowledge of ways financial crises spread across markets caused substantial losses that were incurred by investors.
Originality/value
The current paper addresses the issues of the financial crisis contagion that belong to the group of the most commonly referenced yet least understood notions in finance. Furthermore, the paper focuses on addressing the recently exposed fragility of financial markets' surveillance and regulations. In doing so, the paper employs a pioneering approach to a simulation of the financial crisis contagion by embarking on a qualitative query rather than empirical data. Henceforth, the limitations of the empirical simulations – experienced in the past studies devoted to investigation of the financial crisis contagion – were ameliorated and the findings presented in the paper became of practical use for the markets' practitioners and policymakers.
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This chapter proposes augmenting a simple income stock price model with spatial structures to evaluate the significance of real and financial linkages in instigating stock market…
Abstract
This chapter proposes augmenting a simple income stock price model with spatial structures to evaluate the significance of real and financial linkages in instigating stock market contagion. The treatment is premised upon the clustering of excessive returns and volatilities during the Subprime crisis envisaged from our regime switching analysis over a long time span, and the presence of spatial autocorrelation in the baseline income stock model. With the channel factors manifested as spatial weights, this chapter explores specifications of explicit interrelated stock price returns and implicit spatial autocorrelation in the error term for the 3-year period from 2007 to 2009. Model validity is authenticated by way of model choice and spatial weight selection. The finding shows that spatial dependence in either specification is not too sizable indicating that contagion is not spreading fast in the sample period. Of the various factors considered, non-performing loans, market liquidity, and credit to deposit ratio turn out to be the most important transmission factors. Current account balance, net FDI flows, and size of GDP are among the least significant media. In sum, these suggest that financial linkages could play a more important role in facilitating shock transmission when compared to real linkages such as trade.
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Beatriz Fernández, Teresa Garcia‐Merino, Rosa Mayoral, Valle Santos and Eleuterio Vallelado
The purpose of this paper is to analyze the interaction between the availability of financial information and individuals' cognitive profiles to explain investors' herding…
Abstract
Purpose
The purpose of this paper is to analyze the interaction between the availability of financial information and individuals' cognitive profiles to explain investors' herding behavior.
Design/methodology/approach
The authors designed and conducted an experiment to observe the behavior of subjects in three settings, each with a different level of information.
Findings
Results confirm that a dependence relation exists between information, investors' behavioral biases and the herding phenomenon. Moreover, the experiment shows that information concerning the number of previous transactions in the market is particularly relevant to explain herding propensity among investors. The findings indicate that the cognitive profile of investors is more relevant as the availability of information increases and the number of previous transactions in the market is low.
Research limitations/implications
Future research should examine further the best way to measure the individual's cognitive profile and its interaction with information limitation in financial markets. The presence of high levels of uncertainty favors herding behavior regardless of inter‐individual differences, and only when the availability of information is high and the number of transactions is low does the subjects' cognitive profile explain the investors' herding behavior. Finally, it is observed that not all public information receives the same attention by investors. The attractiveness of public information requires further attention.
Social implications
The herding phenomenon is difficult to anticipate because there are factors of a very diverse nature that intervene.
Originality/value
The research described in this paper measures investors' cognitive profile to identify the interaction between availability of information, cognitive profile and herding.
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Kofi Korle, Anthony Amoah, George Hughes, Paragon Pomeyie and Godson Ahiabor
The purpose of the study is to investigate the role of disaggregated economic freedom measures in the foreign direct investment (FDI) and human development nexus.
Abstract
Purpose
The purpose of the study is to investigate the role of disaggregated economic freedom measures in the foreign direct investment (FDI) and human development nexus.
Design/methodology/approach
The study uses a panel data of 32 selected African countries from 1996 to 2017. A dynamic ordinary least squares (DOLS) with fixed effects and instrumental variable (IV) econometric techniques was used to address issues of endogeneity and serial correlation commonly associated with panel time series data.
Findings
The Results indicate that FDI without accounting for absorptive factors has a positive but insignificant effect on human development for the selected African countries. However, FDI has a positive and significant effect on human development when interacted with measures of economic freedom such as investment freedom, business freedom and financial freedom. In contrast, yet plausible, FDI has a negative influence when interacted with property rights, trade freedom, government integrity and tax burden.
Practical implications
The study posits that to attract FDI into Africa with the purpose of improving human development, relevant absorptive capacities such as business, investment and financial freedom environment are critical. However, excessive capital flight and government interference through taxation and abuse of property rights should be controlled if the continent seeks to promote human development through FDI.
Originality/value
The novelty and originality of the study, are evident in the use of disaggregated measures of economic freedom as comprehensive absorptive capacities to examine how they complement FDI to impact on human development in Africa.
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This paper aims to draw the wisdom of the prohibition of Gharar through the lens of institutional and Post‐Keynesian economics.
Abstract
Purpose
This paper aims to draw the wisdom of the prohibition of Gharar through the lens of institutional and Post‐Keynesian economics.
Design/methodology/approach
This research applies the theoretical contributions of the Post‐Keynesian economics and the new institutional economics to clarify the dimensions of Islamic Gharar. This research attempts to see the divergence between theory and practice, looking at empirical data including the information from an interview with one of Indonesian Islamic banks.
Findings
The lens of institutional and Post‐Keynesian economics is useful to clarify two dimensions of Gharar; incompleteness of contracting and fundamental uncertainty associated with business. As for the latter dimension of Gharar, the tradition of Post‐Keynesian economics can distinguish “animal spirit in speculation” and “animal spirit in enterprise”, the latter of which should be carefully considered. However, the interview reveals a kind of difficulty for Islamic financial institutions to tackle “Murabaha syndrome”.
Research limitations/implications
This research supports an opinion such that Islamic financial institutions are not necessarily discouraged to share the associated uncertainty with the small‐sized firms in the agricultural and industrial sector, so far as their “enterprise” is based on the Islamic business ethics.
Originality/value
Despite very significant discussions in the literature on the prohibition of Gharar as a fundamental principle of Islamic finance, less has been done to elaborate upon it through the lens of Post‐Keynesian economics which have greatly contributed to shedding analytical lights on “uncertainty”.
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Kerstin Lopatta, Magdalena Tchikov and Finn Marten Körner
A credit rating, as a single indicator on one consistent scale, is designed as an objective and comparable measure within a credit rating agency (CRA). While research focuses…
Abstract
Purpose
A credit rating, as a single indicator on one consistent scale, is designed as an objective and comparable measure within a credit rating agency (CRA). While research focuses mainly on the comparability of ratings between agencies, this paper additionally questions empirically how CRAs meet their promise of providing a consistent assessment of credit risk for issuers within and between market segments of the same agency.
Design/methodology/approach
Exhaustive and robust regression analyses are run to assess the impact of market sectors and rating agencies on credit ratings. The examinations consider the rating level, as well as rating downgrades as a further measure of empirical credit risk. Data stems from a large global sample of Bloomberg ratings from 11 market sectors for the period 2010-2018.
Findings
The analyses show differing effects of sectors and agencies on issuer ratings and downgrade probabilities. Empirical results on credit ratings and rating downgrades can then be attributed to investment grade and non-investment grade ratings.
Originality/value
The paper contributes to current finance research and practice by examining the credit rating differences between sectors and agencies and providing assistance to investors and other stakeholders, as well as researchers, how issuers’ sector and rating agency affiliations act as relative metrics.
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Traditionally, individual states have shared responsibility for regulating the US insurance industry. The Dodd–Frank Act changes this by tasking the Federal Reserve with…
Abstract
Traditionally, individual states have shared responsibility for regulating the US insurance industry. The Dodd–Frank Act changes this by tasking the Federal Reserve with regulating the systemic risks that particularly large insurance organizations might pose and assigning the regulation of swap-based substitutes for insurance and reinsurance products to the SEC and CFTC. This paper argues that prudential regulation of large insurance firms and weaknesses in federal swaps regulation could reduce the effectiveness of state-based systems in protecting policyholders and taxpayers from nonperformance in the insurance industry. Swap-based substitutes for traditional insurance and reinsurance contracts offer protection sellers a way to transfer responsibility for guarding against nonperformance into potentially less-effective hands. The CFTC and SEC lack the focus, expertise, experience, and resources to adequately manage the ways that swap transactions can affect US taxpayers’ equity position in global safety nets, while regulators at the Fed refuse to recognize that conscientiously monitoring accounting capital at financial holding companies will not adequately protect taxpayers and policyholders until and unless it is accompanied by severe penalties for managers that willfully hide their firm’s exposure to destructive tail risks.
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