Working Papers

Economic theory in the context of floating exchange rates has focussed on underlying medium and long term direction of exchange rate movements. Daily volatility is less well understood. One theory that offers an explanation for short term exchange rate movements is that of the efficient market hypothesis or EMH. Its application to the forex market allows exchange rate movements to be understood as the reaction of traders to relevant news. In an efficient market traders react to news and specifically to surprise news events which necessitate a re-evaluation of the currency value. We test for the validity of this hypothesis in the context of the daily rand/dollar forex market over a three year period, adding an emerging market case to the literature. We test the significance of macroeconomic news surprises -measured by the difference between actual and forecast data - in driving daily exchange rates. We find that surprises in both real and nominal variables cause a statistically significant reaction in the exchange rate. The results support an asymmetry between news of different origin as only surprises that originate in the U.S. prove significant. Good news also seems to receive greater attention from traders than bad news in our sample. Finally, we find that the statistical significance of variables is time-varying.

The issue of what determines subjective well-being has been at the centre of a recent flurry of research in the economics field. A necessary part of this understanding is the role relative positions (economic, social, geographic) of economic agents, particularly individuals, play in life (commonly referred to in the literature as rivalry). In this paper we concentrate on whether the structure of happiness equations of South Africa are the same/similar to those of developed countries. The analysis uses three of the Durban Quality of Life Studies. Firstly these three data series are pooled and a variety of covariates are tested for their significance on happiness. These include age, marital status, employment status, household income and relative household income. Next we estimate yearly cross-sectional models to see if there are consistent findings of what determines happiness across the period considered. Our findings indicate there maybe some structural differences between results from the Durban studies and those of international findings. Age appears to play no role in happiness likelihood, nor does marital status. Being unemployed does significantly and negatively effect happiness as does the size of household income, relative household income and whether living in a formal dwelling place. When we distinguish between employment categories we find that being self-employed negatively affects happiness, contradicting findings for developed countries. Future research will concentrate on the most recent Durban studies, in which information on health and crime are available, both of which are expected to significantly effect happiness given the well documented nature of these problems in South Africa.

The literature on Mergers and Acquisitions activity has espoused various explanations for M&A activity. Some of this captures the nature of defence mechanisms again takeovers. In all the expositions the agency conflicts and degrees of collusion among the claimants to the firm’s cash-flows, are apparent. In this paper we add to the literature by presenting an integrated framework that classifies manager behavior and corporate governance, and show how a manager can use M&A bids as a vehicle for maximising their own benefits, rather than shareholder value. The M&A bid targeted by the manager could simply be for diversionary reasons that seek to enable the manager to hold on to his employment and benefits, even though he may be a poor manager. We also consider M&A activity that benefits both managers and shareholders. In this analysis, M&A activity is driven by the manager’s appetite for M&A activity, both beneficial and unbeneficial. The analysts, who are employed by investment banks, that advise on the M&A activity, collude with management. The analysts forecast inflated earnings for a company because the fees they earn as a portion of what the investment bank earns, are related to the size of the transaction which in turn is determined by the inflated future earnings. The agency conflicts between shareholders, investment banks and their analysts, and managers of the company, are central to our framework.

The paper is concerned with the growth impact and the determinants of foreign direct investment in South Africa. Estimation is in terms of a standard spill-over model of investment, and in terms of a new model of locational choice in FDI between domestic and foreign alternatives. We find complementarity of foreign and domestic capital in the long run, implying a positive technological spill-over from foreign to domestic capital. While there is a crowd-out of domestic investment from foreign direct investment, this impact is restricted to the short run. Further we find that foreign direct investment in South Africa has tended to be capital intensive, suggesting that foreign direct investment has been horizontal rather than vertical. Determinants of foreign direct investment in South Africa lie in the net rate of return, as well as the risk profile of the foreign direct investment liabilities. Policy handles are both direct and powerful. Reducing political risk, ensuring property rights, most importantly bolstering growth in the market size, as well as wage moderation, lowering corporate tax rates, and ensuring full integration of the South African economy into the world economy all follow as policy prescriptions from our empirical findings.

This paper applies an alternative dating algorithm - suggested by Harding and Pagan (for example, 2002a) - to identify the turning points of the South African business cycle. The characteristics of the resulting business cycle are analysed and compared with results obtained for the o¢cial cycle in recent papers on the South African business cycle (du Plessis and Smit, 2003; du Plessis, 2004). The alternative business cycle has plausible characteristics and provides supporting evidence for the thesis that monetary policy has been used more consistently to dampen the cycle of economic activity in South Africa since the early nineties.

Many companies establish collaborative relationships (CRs) with suppliers either alongside or in preference to purchasing parts through a process of competitive bidding (CB). CRs over flexibilities and options arising mainly from the “looseness” of the contractual relationship. One significant decision element confronting a firm intending to engage in a CR is when to enter such a relationship and when to abandon it. This paper develops a model that focuses on such timing issues. It provides an optimal timing valuation approach to establishing/abandoning a CR that incorporates differential learning rate payouts. To achieve this, a real options’ frame of reference is adopted that enables a formal analysis of the contingencies embedded in a CR. A standard illustration of the application of the model is provided.

We model cartel defection in markets with stochastic demand fluctuations as an investment timing problem. We show that (i) the optimal timing of cartel defection is pro-cyclical, suggesting higher probability of competitive pricing during booms; and (ii) the defection trigger is a positive function of demand variability, and larger than its deterministic demand counterpart, implying that market volatility facilitates collusion. The first result is consistent with the counter-cyclical pricing prediction originally due to Rotemberg and Saloner (1986), but not dependant on lack of persistence in demand fluctuations. The analysis reveals insights on implications of co-variation between volatility and demand shocks.