Information and Market Efficiency; Event Studies
This paper examines the temporal effect of domestic monetary policy surprises on both the levels and volatility of the South African rand/United States dollar exchange rate. The analysis in this ‘event study’ proceeds using intra-day minute-by-minute exchange rate data, repo rate data from the South African Reserve Bank’s scheduled monetary policy announcements, and Bloomberg market consensus repo rate forecasts.
South African white maize is considered to be significantly more volatile than any other agricultural product traded on the South African Futures Exchange (SAFEX). This accentuates the need to effectively manage price risk, by means of hedging, to ensure a more profitable and sustainable maize production sector (Geyser, 2013: 39; Jordaan et al., 2007: 320).
The financial sector of emerging economies in Africa is characterized by a non-competitive banking sector which dominates any direct participation of agents in asset markets. Based on a variant of Diamond and Dybvig's (1983) model of financial inter-mediation, we formally explain both stylized facts through market inexperienceof agents in emerging economies. While experienced agents correctly predict future mar- ket clearing equilibrium prices, inexperienced agents are ignorant about future market equilibria.
This paper analyses how systematic risk emanating from the macro-economy is transmitted into stock market volatility using augmented autoregressive GARCH (AR-GARCH) and Vector autoregression models. Also examined is whether the relationship between the two is bidirectional. By imposing dummies for the 1997-98 Asian and the 2007-2008 sub-prime financial crises, the study further analyses whether financial crises affect the relationship between macroeconomic uncertainty and stock market volatility.
We implement a recursive out-of-sample method to examine anomalies-based ex-ante predictability in the cross-section of stock returns. We obtain a series of simulated out-of-sample returns, consistent with investors using only prior information when choosing predictor variables. We find that, by commonly used performance criteria, real-time trading strategies based on size, value and momentum effects would not consistently outperform a passive index of South African stocks - despite consistent in-sample excess returns.