OpenUCT :: Browsing by Author "Abraham, Haim"

Browsing by Author "Abraham, Haim"

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Open Access
Analysis of hedge funds' performance in South Africa
(2013) Cephas, Dube; Abraham, Haim
Includes abstract. Includes bibliographical references.
Open Access
The Black-Scholes model and the pricing of stock options in South Africa
(1999) Hassan, Shakill; Abraham, Haim
Option Pricing Theory (OPT), along with the Capital Asset Pricing Model, the Theory of Capital Structure, and the Efficient Markets Hypothesis, form one of the pillars of modem finance theory. Central to OPT is the Black-Scholes model, the first option pricing model derived within a general equilibrium framework, and therefore consistent with all arbitrage conditions an asset pricing model must satisfy. An attempt is made at explaining this model, and the first part of the paper is devoted to this objective. The appreciation of the theoretical elegance of the Black-Scholes model can be considerably enhanced through the understanding of the issues that made (and still make in the case of American put options) the derivation of an equilibrium model of option pricing such an immense task. With the intention of emphasising such issues, the first section of Part One covers the option pricing models that had been suggested before Black and Scholes (and Merton). This helps to put the Black-Scholes model in context, as well as facilitate an understanding of the approach Black and Scholes adopted in developing their model. Its derivation is the central focus of section 3, the second section of Part One. The second part of the paper contains an attempt at testing the Black-Scholes model, first in its "pure form," and then adjusted to account for the possibility of early exercise. Simple regression tests are performed, where daily prices of a sample of stock options traded on the Johannesburg Stock Exchange are used as dependent variables in regression equations. Black-Scholes model prices are computed, and used as the explanatory variables in these equations. But before the tests could be conducted, the distributions of the underlying assets' returns had to be examined and due consideration had to be given to the estimation of the volatility parameters. Part Two starts with a very brief overview of the South African exchange-traded stock options market. This is followed by a description of the data used in the tests, and discussions on the statistical behaviour of the underlying assets. A discussion on volatility estimating follows, and the test results are then presented.
Open Access
Can a proxy for international investor sentiment towards emerging markets be identified?
(2003) Bhala, Satish Kumar; Abraham, Haim
International portfolio diversification is an area of popular academic interest. Most of the research is based on linkages between developed markets or between developed markets and emerging markets. Emerging markets have only been a feature of research for periods of crisis and contagion such as the emerging market crisis of 1997 and 1998. The common argument used to explain the cause of the stock market linkages is based on economic slowdowns (or deep-recession), large balance of payment problems or other macro-economic problems in the emerging markets. Contagion or herding behaviour is an alternative explanation to the cause of the co-movement of emerging markets. Contagion or Herding behaviour is based on the assumption that it is too costly to acquire information. Investors thus remain uninformed in the countries in which they invest. Investors try to infer future movements in one market based on how the rest of the market is reacting. The uniformed investors follow the supposedly informed investor. These information frictions can make investors follow the market, rather than take the time and expense to make their own assessments about the market fundamentals. This research aims to identify countries that are regarded as similar by international investors. Countries that are regarded as similar can be grouped together to form separate clusters. This research attempts to ascertain as whether there has been any change of perceptions since the emerging market crisis of 1997 and 1998, hence any change in the composition of above-mentioned clusters.
Open Access
Can bank regulators use financial markets as indicators for supervisory intervention? : an event study analysis on the impact of earnings announcements on bank equity
(2007) Mothobi, Munyarari Bernard Simangaliso; Abraham, Haim
Includes bibliographical references (leaves 32-35).
Open Access
Constrained portfolio selection with Markov and non-Markov processes and insiders
(2007) Durrell, Fernando; Ouwehand, Peter; Abraham, Haim
Word processed copy. Includes bibliographical references (p. 158-168).
Open Access
Derivatives and Economic Growth in South Africa: Lessons for Kenya
(2019) Mulei, Mutava Michael; Abraham, Haim; Mateane, Lebogang
Kenya is now at advanced stages of introducing a derivatives market. Its aim is to enhance Kenya’s medium-term growth prospects as outlined in the capital markets master plan 2014- 2023. This study interrogates the effect of derivatives on economic growth and growth volatility, learning from the South African experience. The study also identifies some of the factors that drove South Africa’s implementation of derivatives as a development tool - Some countries have enacted legislation for it yet have never transitioned to successful operations. The study paints a picture of the current global and regional view of derivatives and examines empirical evidence from previous studies. Using a GMM approach, the study finds no significant relationship between trading derivatives and economic growth in South Africa. Thereafter, economic growth volatility is modelled using the GARCH method and the effects of derivatives on that volatility are tested. No effect is found. The study finds that the derivative market in South Africa is not yet sufficiently developed to benefit the economy. Finally, the relationship between economic development and derivatives is appraised using a Granger causality test: this suggests that development tends to engender the evolution of derivatives in the long run.
Open Access
Effects of systemic risk, exchange rate risk and collateral demand: the enforcement of initial margin on South African over‐the‐counter derivatives
(2021) Kennedy-Palmer, Storme; Abraham, Haim
In their commitment to implementing G20 regulatory reforms to the over‐the‐counter derivatives market, a critical decision faced by South African Authorities is whether to authorise the use of risk‐sensitive models or the standardised schedule to estimate initial margin requirements on non‐centrally cleared derivatives and which central clearing counterparty/ies, if any, to licence. Overburdensome collateral demand has systemic risk implications; therefore, collateral demand for local dealers under three potential market structures is estimated in this study. Initial margin requirements calculated using risk‐ sensitive models vary with market risk to cover counterparty credit risk; thus, the volatility dynamics of the underlying asset are analysed to determine the degree of fluctuation in collateral demand under various market stress scenarios. Lastly, the potential foreign exchange rate exposure to local dealers from licencing an international central clearing party is quantified and examined. Collateral demand calculated with the risk‐sensitive models used by central clearing counterparties and for non‐centrally cleared derivatives is sensitive to the market volatility scenarios, spiking during periods of market stress, highlighting the pro‐cyclical nature of these requirements. The standardised schedule is not pro‐cyclical; however, collateral requirements were found to be higher during tranquil and normal market conditions. Authorities should weigh this trade‐off between microprudential and macroprudential goals. There is an incentive for dealers using the standardised schedule to centrally clear contracts to lower collateral requirements. The sensitivity of collateral demands to other risk‐sensitive model inputs was investigated. It was found that dealers can limit their collateral exposure on non‐centrally cleared derivatives when using the risk‐sensitive approach by using a higher decay factor and VaR risk measure if Authorities do not prescribe these. The most significant reduction of initial margin on both centrally and non‐centrally cleared derivatives can be achieved by dealers balancing their books instead of relying on more complicated delta hedging techniques. Should an international clearing counterparty be licenced, Authorities should be prepared for a substantial increase in the demand for foreign currency. The transaction foreign exchange rate exposure was measured in USD and GBP, and it was found that the exposure demanded in USD was lower and relatively more stable than that in GBP. Authorities could significantly reduce foreign exchange rate exposure by licensing domestic central clearing counterparty/ies instead of international clearers.
Open Access
Empirical essays in financial economics
(2010) Endi, Ali Ahmed; Abraham, Haim
Paper 1 focuses on implied volatility estimation and investigates the volatility smile in a South African context with fourteen stocks listed on JSE Limited and fifty-nine options on these underlying stocks for the period April 4, 2002 to November 8, 2008. Paper 2 uses an empirical approach, based on the CAPM model, to study the risk and return relationships of A shares (available for domestic investors) and B shares (available for foreign investors) in the Shanghai Stock Exchange. Paper 3 takes an empirical approach to examine and compare three different methods for measuring the trade-off between the risk and the return of trading stocks in both South Africa and China. Paper 4 suggests an empirical framework as a possible mechanism to describe asset-price bubbles.
Open Access
Equilibria in overlapping generations models
(1992) Mackensen, Heide C U; Abraham, Haim
Interest rates are fundamental in the explanation of equilibrium prices over time, because they provide the link between the present and the future. Capturing this dynamic feature, the overlapping generations model is particularly suitable to address the interest rate problem, as has been shown by Paul Samuelson, David Gale and Costas Azariadis. This thesis reviews their contribution to the theory of interest: with his consumption-loan model, Samuelson sets the analytical framework for subsequent research. Furthermore, he demonstrates that the optimal interest rate is unstable, implying that a competitive economy may fail to approach the social optimum. The Samuelson and classical sets of assumptions are consolidated in the intertemporal exchange model of Gale. Its equilibrium nature, however, ignores the sequential adjustment of disequilibrium interest rates to their equilibrium values. Consequently it is difficult to comment on the direction of causality involved in the interest rate determination, unless a clearing house is introduced which simultaneously resolves the starting-up, continuity and causality problems. Departing from the full certainty scenario, Azariadis analyses the existence and likelihood of self-fulfilling prophecies. It is shown that the implications of the economy's assumed Markovian structure are twofold: while facilitating the parametric treatment of the transition probabilities, it negates the question concerning the likelihood of sunspot equilibria. Within the specified framework it is impossible to explain how the economy arrives at such equilibria; it is only possible to identify the conditions that maintain (once they exist) these self-fulfilling prophecies.
Open Access
An evaluation of hospital efficiency in Nigeria : a stochastic frontier approach
(2001) Ikenwilo, Divine; Abraham, Haim; Muheki, Charlotte W
Some people have argued that there is no reason to expect economic efficiency in a government enterprise because the funds allocated to various ends have to be exhausted to meet targets. In a social and welfarist sense, this argument seems valid if in essence, such earmarked targets, to improve societal welfare, are met. However, in the face of rising hospital costs and insufficient government funds, the issue of effectively allocating government funds to alternative uses becomes paramount. The setting for this research paper is Nigeria. This research work aims at investigating how well financial resources are used in government hospitals in Nigeria. It not only explores the resources employed in hospitals, but also how well these hospitals use minimum resources to achieve maximum outpatient and inpatient output. Hospital cost and expenditure data are collected from 40 government cottage and general hospitals in South East Nigeria (Anambra and Enugu states specifically). The data is collected by means of open-ended questionnaires, which are filled in by relevant administrators in the hospitals visited and also by ministry of health personnel at the state levels. The main research question asked is whether hospitals in this part of the country (and indeed Nigeria as a whole) are allocatively inefficient. A second question as to whether hospitals in Anambra State are more efficient than Enugu State is also posed. The major component of the research involves using the cost and expenditure data to build cost functions for the entire hospitals studied. The main thrust of analysis is the stochastic frontier process, which also incorporates an efficiency effects model. The choice of this model, above all else, is because it provides numerical efficiency estimates and thus provides quantifiable proof of how well poorly Nigerian hospitals fare. It is found in the analysis of the data collected that the hospitals studied are generally inefficient, as 70 percent of them operate at costs above the average permissible cost frontier.
Open Access
An examination of kurtosis of lognormality in the Black-Scholes option pricing formula in the South African warrants market
(2005) Chen, Hung-Hsiang; Abraham, Haim
The assumption of constant asset price volatility of classical Black-Scholes model hasbeen challenged continuously. The symmetrical distribution emphasises a lognormalized asset. This paper aims to investigate the volatility distribution (i.e. kurtosis) of the South African warrants market at Johannesburg Stock Exchange based on a comparison of option implied distributions of the terminal price of the TOP European Call option with lognormal distribution. The result indicates that the constant volatility of Black-Scholes model does not show in the selected warrant market.
Open Access
Financial liberalisation and banking crises in sub-Saharan Africa
(2013) Gamariel, Gladys; Abraham, Haim
This study aims to investigate the causal effect of financial liberalisation policies on the stability of banking sectors in selected countries in Sub Saharan Africa (SSA). The study is motivated by theoretical emphasis on the competing in uence of financial liberalisation in fostering financial development, but also giving rise to financial systems that are more vulnerable to systemic risk. This thesis addresses critical issues concerning measures of nancial liberalisation used in empirical studies. While different research bodies have produced several liberalisation indices, most datasets cover developed and developing countries outside Africa. Most of the existing indices are therefore not useful in cross-country and panel studies in SSA. To address this measurement issue, this thesis constructs a new set of liberalisation indicators using country by country information on the timing of seven liberalisation policies. The study considers 12 SSA countries using the framework developed by Abiad et al. (2008). Thus, this study extends the financial liberalisation database of Abiad et al. (2008) from 14 to 26 SSA countries.
Open Access
Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC
(2016) Mahawiya, Sulemana; Abraham, Haim
The focus of this study is two-fold. First, it examines the relationship between financial development and growth. Second, it investigates the role of foreign banks, inflation and openness in the state of financial development. The above are discussed in relation to a comparative study of regional economic blocs of Economic Community of West African States (ECOWAS) and Southern African Development Community (SADC) in three essays for the period 1980-2011. The dissertation comprises four essays as stated below. Existing studies on financial system development usually rely on single measure of financial development which is inadequate in capturing the financial system properly and leads to mixed results. This research addresses this critical issue by constructing a composite measure of the variable. The first essay provides a comparative analysis on the impact of financial development on growth and development between the two regions. In addition, it investigates the influence of financial development through political development on growth. The motivation stem s not only from inadequate studies on regional economic blocs, but, importantly, the methods applied in previous panel studies ignored issues of heterogeneity. To address this, the study employ s a combination of methodologies, Pooled Mean Group, Mean Group and Dynamic Fixed Effect approaches. These approaches also capture both the short run and long run dynamics. The results indicate that financial development induces economic growth in both regions with the impact in SADC more than that of ECOWAS. Also, more political development robustly supports more financial sector to impact on growth positively in ECOWAS, but not in SADC. Finally, the speed of adjustment suggests that deviations from the long run equilibrium path following a shock are corrected at about 13% per year in ECOWAS and 15% in SADC The second essay, which is another comparative study, addresses the question of why some countries having underdeveloped financial systems after it has been established that the sector is vital for growth. SSA has one of the least developed financial systems, and, since the first essay documented that indeed the sector is crucial to growth, the main aim of this essay is to investigate whether inflation and openness to trade and financial system (that is, Rajan and Zingales Hypothesis) matter for financial development. Importantly, the effects of the growing communication infrastructure on financial development is also captured, which is a novelty. Four approaches were used: Least square dummy variable, Feasible GLS, Panel corrected standard errors and seemingly unrelated regression. The main findings provide evidence that in both regions inflation robustly reverse s financial development with the effect in ECOWAS much more. Overall, the results seem to indicate that the cost of inflation to the financial system is genuine and not explained by a sort of omitted variable bias. Access to communication indicated a strong positive effect on financial development in both regions, with the impact in SADC more. Finally, the study indicates that even though more simultaneous opening of the financial sector and trade lead to more financial development in SADC, trade openness alone still enhances development in the sector. However, more financial openness alone is detrimental to financial development in the region. Hence, this seems to provide partial support for the hypothesis in SADC. The hypothesis, however, is rejected in ECOWAS. The third essay examines the asymmetric effects of inflation on financial development. It is motivated by existing theories which posit that the detrimental effects of inflation on the financial development is only observed beyond certain threshold level. The study is the first of its kind to be conducted on SSA, especially on regional economic blocs. Using a novel Panel smooth transition regression that endogenously determines this threshold value, a comparative study is conducted between the two regions. The results suggest evidence of the existence of a robust single threshold of 17.9% inflation for ECOWAS and 14.5% for SADC. The result indicates that inflation above these thresholds presents significant detrimental effects for financial development in both regions. The last essay focuses on financial sector stability via banking sector stability. It is motivated by the evidence that the financial system of the two regions are bank based which is also over 50% foreign bank dominated. Specifically, the essay investigates the effects of foreign banking inflows on banking crisis (financial instability) of both regions for the period 1995-2009. This objective is informed by the widely held conventional wisdom that foreign banks lack long term commitment to the domestic financial system and will leave at the first sign of trouble. This can stir instability in the sector. The study employs two econometric approaches, namely, the multivariate logit and the t wo-step system generalised method of moment using bank crisis measure constructed by Laeven and Valencia (2012) and bank z-score (Bankscope). The main results of the methods indicate evidence that the presence of foreign banks in the domestic banking sector reduces the probability of bank crisis. Generally, the results reveal that the benefits from the foreign banks in the financial system are unaffected by any sort of omitted variable bias. This study has significant implication for policy formulation since it is the first study on comparative analysis between two regional economic groups in SSA. The study argues that more efforts should be committed in improving the financial system and governance. Improvement in the legal system can enhance financial development and this should be coupled with good macroeconomic policies. The study recommends that price stability policies with inflation targeting framework that falls below the estimated threshold, should be the primary objective in monetary policy. Furthermore, more investment into telecommunication industry is necessary for FSD and should be given attention. In terms of foreign banking inflows, the study advocates for a cautious approach towards attracting more foreign banks as well as more opening of the financial sector.
Open Access
An investigation into the technology stock bubble
(2005) Endi, Ali Ahmed; Abraham, Haim
This dissertation investigates whether technology stock prices in the NASDAQ stock market over the past 10 years contain evidence of the existence bubbles. In recent years, a sharp divergence of NASDAQ stock exchange equity prices from dividends has been noted. Our investigation focuses on whether this divergence can be explained by reference to the presence of bubbles.
Open Access
Is management of risk sharing by banks a cause for bank runs?
(2010) Abraham, Haim
A bank, acting as a central planner under aggregate full certainty, optimizes liquidity allocation by sharing risk between discrete number of depositors. This paper demonstrates the following. (a) It is sufficient to rule out a bank run if all depositors inform the bank their types, patient or impatient, in advance, in a noncommittal manner. There cannot be a bank run because depositors’ strategic behaviour induces the bank to act as a central planner under aggregate full certainty. (b) The impossibility of a bank run is consistent with the price mechanism in partial equilibrium; but it may be inconsistent with the price mechanism in general disequilibrium. (c) The paper concludes that the management of risk sharing by banks is not a cause for bank runs.
Open Access
Measuring and managing credit risk in derivative structures
(2005) Mann, Waron John; Abraham, Haim
The problem being addressed in the dissertation originates from the fact that the risk of default between counterparties are increasing, and becoming more complex and interrelated. Due to global changes like globalisation, deregulation, increasingly competitive markets, process improvements, changing customer bases, changing workforces and changing markets, the increase of credit risk within the financial system is inevitable.
Open Access
Non-linear dynamics and stock return predictability on the JSE securities exchange of South Africa
(2004) Mangani, Ronald Dadi; Abraham, Haim
Recent South African asset pricing research has generally established a preference for the arbitrage pricing theory of Ross (1976) over the capital asset pricing model of Sharpe (1964) and others. However, both the APT and the CAPM are single-period linear models based on the assumption that security prices follow a normal strong random walk process or, equivalently, that security returns are normally and linerly distributed. A crucial implication or this assumption is that the prices and returns are unpredictable, hence it is not possible to earn excess returns on the market through the innovative use of relevant information.
Open Access
The optimal valuation of Black Economic Empowerment transactions in South Africa
(2013) Nashenda, Natalia Linda Theresia; Abraham, Haim
There is uncertainty about how best to determine the final payoff at maturity of various BEE transactions entered into by a number of South African companies. This thesis attempts to develop a method which will price these transactions accurately based on a sample of transactions entered into between 2004 and 2011. The primary valuation methods which will be used are Real Options Valuations, Risk–Neutral Valuations, Implied Trinomial Tree Valuations and valuations performed using the Black-Scholes-Merton Model. Various amendments to each of these methods are introduced in order to correct for pricing biases inherent in each valuation model.
Open Access
Performance of Zambian Commercial Banks in the Post-Liberalisation Period: Evidence on Cost Efficiency, Competition and Market Power
(2010) Simpasa, Anthony Musonda; Abraham, Haim
This study investigates three aspects important of performance for Zambia commercial banks. Specifically, the thesis addresses the aspect of cost efficiency and the factors that affect inefficiency performance. The study also empirically answers the policy question regarding the banks' exercise of market power and the low degree of competition. Using a richly assembled panel data set obtained from the Bank of Zambia on individual banks from 1998 to 2006, the thesis utilises theoretically sound methodologies in addressing these research questions. The results from the analysis reveal the following. Firstly, using stochastic frontier estimation approach, cost inefficiency was estimated to be 8 percent. This means that mismanagement of resources was an impediment to the efficiency performance. Nonetheless, we observed a reduction in cost inefficiency over time, with domestic private banks displaying remarkable improvement. A combination of bank-specific and exogenous factors deterred banks from attaining optimal cost efficiency. Notably, impaired loans, asset concentration and macroeconomic instability undermined the banks' ability to operate optimally. Regulatory factors did not exacerbate cost inefficiency. Secondly, Zambian banks operated in an oligopolistic set-up. Based on a methodology anchored in the New Empirical Industrial Organisation literature, the results of a competitive test showed that banks earned their revenue under conditions of monopolistic competition. This finding was buttressed by the estimated time varying Lerner Index, a measure of market power. The index showed that commercial banks set their prices above marginal cost by more than 50 percent. However, the degree of market power narrowed towards the end of the sample period. Market concentration, efficiency performance, diversity in revenue sources and regulatory intensity accounted for much of the banks' exercise of market power. On the other hand, the high proportion of interbank deposits, credit risk exposure and inflation dampened the banks' exercise of market power. To our knowledge, this study is the first of its kind in Zambia. Therefore, the results of the thesis have important policy implications. More significantly, since there is room for deepening the degree of competition and furthering efficiency gains, regulatory authorities should strengthen measures aimed at ameliorating risk problems in the banking industry in a bid to lower the banks' exercise of market power. The authorities should also accelerate should also accelerate efforts of reducing recourse to Treasury bills as a deficit financing tool in order to negate the banks' appetite for securities as a source of revenue. This can be done by placing more emphasis on the legal and institutional framework for resolving problem credit situations. This will intensify competition and propagate efficiency gains in the banking market. The authorities should also expeditiously tackle instability in the macroeconomic environment, particularly the high rate of inflation which hampered the banks' revenue performance and exacerbated the exercise of market power
Open Access
Price formation under uncertainty
(2003) Du Preez, Johan; Abraham, Haim
The analysis presented in this thesis is aimed at better understanding the role of expectations to the price formation process. Since general competitive analysis lacks a coherent explanation of how expectations are formulated it is difficult to promote theories that assume agents have no structural knowledge in favour of theories that assume agents have significant structural knowledge, e.g. rational expectations hypothesis versus the theory of rational beliefs. Accordingly, empirical evidence is presented to support analyses of models in which agents are not assumed to have structural knowledge. Simple general equilibrium models are used to illustrate that modelling risk requires a thorough analysis of investor expectations embedded in asset prices to better understand the information conveyed by observed risk premia. Analysis of the role of diverse expectations in competitive equilibria shows that a prerequisite for the existence of a short-run Walrasian monetary equilibrium is the existence of at least one agent whose expectations are insensitive to current prices. Ergodic theory shows that any stable dynamical system generates a stationary probability measure based on its underlying generating probability that is unrelated to the data generated by the dynamical system. This result is used to show that the conditions under which diverse beliefs arise are sufficiently general to warrant the study of the impact of diverse expectations on the price formation process. Enthusiasm for models that allow diverse beliefs is however tempered by a review of Sunspot theory that show that it is not necessary to abandon the rational expectations hypothesis in order for competitive markets to be subject to speculative fluctuations that are driven by expectations. This analysis is reinforced by a known example that shows that adaptive learning rules can lead rational agents to believe in nonstationary, indeterminate equilibria that are locally stable, such as Sunspot Equilibria. This leads to an important conclusion; diverse beliefs are not temporary phenomena since disequilibrium-learning analysis cannot be relied on to teach investors the economy's equilibrium map.