International Economics

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    FOREIGN EXCHANGE-RISK PRICING IN THE NIGERIAN STOCK MARKET
    (University Of Ibadan, 2012-07-22) AFOLABI, EMMANUEL OLOWOOKERE
    Foreign Portfolio Investment (FPI) is a major source of liquidity to domestic firms. However, foreign exchange-risk makes returns to foreign investors uncertain thereby discouraging FPI. This uncertainty is more pronounced in developing economies where exchange rates play key roles and markets for hedging are underdeveloped. While studies from different economies have shown that firms hedge foreign exchange-risk or pay a premium to investors who bear it, previous studies on Nigeria have paid little attention to this important source of risk. A manifestation of this risk was the exchange rate depreciation from N117.97 per US dollars in 2007 to N132 in 2008 coinciding with an outflow of N633.96 billion from the Nigerian Stock Exchange (NSE). Therefore, this study analysed the foreign exchange-risk exposure and the premium (price) paid to risk-averse investors bearing this risk. The Adler and Dumas international capital asset pricing model was modified to incorporate the liquidity state of the NSE and this provided the framework for estimating the Fama and MacBeth two-pass regressions. Employing NSE data on 200 Nigerian firms from January 2000 to December 2009, the first-pass time-series regressions were used to estimate the risk exposure, while the second-pass pooled cross-sectional time-series regressions, with corrected standard errors, were used to estimate the risk prices. The pooled regressions solved the error-in-variable problem and the loss of the first five years typical of the Fama and MacBeth method. Deviations from Purchasing Power Parity (PPP) were also computed and used to complement changes in the bilateral rates and Real Effective Exchange Rate (REER) that were the conventional measures of foreign exchange-risk. Moreover, empirical analyses were broken down by firm-size, sector and episodes of exchange rate changes. More than 80.0% of Nigerian firms were exposed to bilateral exchange rate risk; over 60.0% to PPP-deviation risk and about 12.0% to REER risk. Foreign exchange-risk exposure was mostly negative; implying that Nigerian firms were net importers. Thus, because firms were unable to hedge their exposure to foreign exchange risk, their average monthly values reduced by 1.67% as a result of exchange rate depreciation. Foreign exchange-risk exposure was higher generally in larger firms and particularly in financial firms and there was the tendency for more firms to be exposed during episodes of naira depreciation. Further, foreign exchange-risk was priced (undiversifiable) on the NSE as risk-averse investors demanded a monthly premium of 1.65% on the bilateral rate risk, 0.99% on the PPP-deviation risk and 0.23% on the REER risk. Exposure to the bilateral exchange rate risk, the PPP-deviation risk and REER risk therefore raised the annual cost of capital of Nigerian firms by 19.80%, 11.88% and 2.76% respectively. The widespread foreign exchange-risk exposure commanded a risk premium on the Nigerian stock market. Therefore, the regulatory authorities should recognise that firms‘ costs of capital tend to rise as Nigeria‘s exchange rate system becomes more market-determined and should design appropriate instruments for hedging. Nigerian firms also need to actively manage their exposure to foreign exchange-risk.
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    MACROECONOMIC EFFECTS OF CAPITAL ACCOUNT LIBERALIZATION: EVIDENCE FROM SUB-SAHARAN AFRICA
    (University Of The Witwatersrand, 2019-04-21) Mughogho, Tamara Esther
    This thesis examines the macroeconomic effects of capital account liberalization (CAL) for a panel of Sub-Saharan Africa (SSA) countries from 1996 to 2013. Specifically, the study examines the effects of CAL on capital flows, financial sector development, financial crisis, and exchange rates. For this study, several methodologies are employed and these include System-Generalised Method of Moments (GMM), Least Squares Dummy Variables (LSDV), Fixed Effects (FE), Autoregressive Distributed Lag (ARDL) Models, and Propensity Score Matching (PSM) techniques. The study makes several key findings. Firstly, the study finds that liberalizing capital inflows promotes the inflows of capital into SSA. This is particularly so for foreign direct investment. The study also provides evidence of significant thresholds effects of institutional quality and financial sector development. That is, higher levels of institutional quality and financial sector development help to enhance the effects of CAL on capital flows. Secondly, the study unearths that CAL, implemented on its own, has a negative effect on financial sector development. However, liberalization of capital accounts coupled with substantial trade openness has a positive effect on financial sector development. It is also concluded that liberalization of capital flows reduces the exchange market pressure in SSA. This implies that capital account openness is unlikely to induce a currency crisis for SSA. This result holds even after controlling for sample selection bias. Lastly, the findings of the study suggest that CAL leads to exchange rate appreciation for SSA countries. However, this effect is attenuated with higher levels of financial sector development. The study has made significant contributions to the body of knowledge in several key ways. Firstly, the study provides regional evidence of macroeconomic effects CAL in SSA where extant studies for SSA have mostly been single country studies which focused on examining effects on economic growth. In addition, the study makes methodological contributions by employing sample splitting techniques, to examine the presence of threshold effects, and examining potential non-linear dynamics in the effects of CAL. Lastly, the study employs a new measure of CAL which, not only builds upon past measures and improves on them, but also disaggregates CAL based on several criteria such as asset type, the direction of liberalization and whether liberalization is on residents or non-residents.
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    EXCHANGE RATE PASS-THROUGH TO IMPORT AND DOMESTIC PRICES IN NIGERIA, 1980-2006
    (UNIVERSITY OF IBADAN, 2008-10-01) OYINLOLA, Mutiu Abimbola
    There is a strong relationship between exchange rate movement and domestic prices in an import-dependent economy. The adoption of the Structural Adjustment Programme in Nigeria in 1986 caused a significant upward movement in the exchange rate. The official exchange rate depreciated by 56.2% annually between 1986 and 1993, and it was 31.6% during 1994-2003 period. Over the same periods, the general price level rose by 30.5% and 23.7% respectively. Specific studies on exchange rate pass-through to prices in Nigeria are scarce. This study therefore examined the extent of exchange rate pass-through to import and domestic prices in Nigeria during the period 1980-2006. A price model that recognised the developments in the tradable and non-tradable sectors of the economy was used. The tradable component drew largely on Sharma’s price transmission analysis that was predicated on the purchasing power parity doctrine. Both the Engle-Granger and the Johansen cointegration techniques were used to estimate the price model. The techniques made it possible to separate the effects of short-run exchange rate dynamics from those of the long-run. The time series properties of the variables in the model using various criteria, including the Augmented Dickey-Fuller and Phillip-Perron tests, were ascertained. A ‘general-to-specific’ methodology, which involved over-parameterised error correction specifications, was adopted. Tests statistics indicated that the models exhibited high degrees of goodness of fit. Annual data were used for the estimation. In order to capture the effect of exchange rate pass-through to import prices across product groups, import and tariff data were disaggregated according to the harmonized system of trade classification. At the aggregate level, exchange rate pass-through to import prices was found to be incomplete, while the disaggregated results showed varying degrees ranging from low to more than complete pass-through. Both the short-run and long-run effects of exchange rate pass-through were evident, but occurred with lags. All the results obtained were significant at the 5.0% level. In the short run, a 10.0% depreciation of the exchange rate led to 9.0% increase in import prices. The same percentage depreciation raised import prices by 2.5% in the long-run. The pass-through in the vegetable, and boiler and machinery products groups recorded 11.5% and 19.2% increase, respectively. By interpretation, Nigeria absorbed the full impact of any exchange rate shocks and also part of the cost of production of the exporters of these products. Comparatively, the effect of a 10.0% depreciation was correspondingly 2.8% and 8.0% in the 3 optical and paper making material products. This meant that part of the exchange rate shocks was absorbed by the exporters. The sectoral differences in exchange rate pass-through were significantly related to the product group’s share in total imports. In addition, a 10.0% depreciation raised domestic prices by 7.5%. There was a significant exchange rate pass-through to import and domestic prices in Nigeria. Commitment to supply-side policies is desirable in order to boost domestic production of goods and lessen dependence on imports. This would moderate the effect of exchange rate shocks on import and domestic prices.