Thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy in the Faculty of Commerce, Law and Management, Wits Business School at the University of Witwatersrand, Johannesburg 2016 / The primary objective of this study was to investigate the role played by financial market development (FMD) in harnessing international capital flows of foreign direct investment (FDI) and foreign portfolio investment (FPI) in nine selected African economies, from 1980 to 2014. The study employed various econometric techniques such as the Generalised Method of Moments (GMM) for the dynamic panel data, Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration, Vector Error Correction Models (VECM) as well as Granger-causality tests. Using Principal Components Analysis (PCA), we also developed an infrastructural development index, as well as one for financial market development. The results highlighted that FDI to sampled African countries are determined by agglomeration effects, FPI, human capital development, real gross domestic product (GDP) growth, interest rates, inflation, infrastructure, trade openness, institutional quality, natural resources, and only certain individual financial market variables. FDI determinants are magnified by the application of the infrastructural and financial market development indices. FPI inflows, on the other hand, are influenced by FDI, exchange rates, stock market capitalisation, financial system liquidity, FPI agglomeration effects, capital account openness, and real GDP growth rates. The composite FMD index has a positive and highly significant effect on both FDI and FPI inflows to the selected African countries. There is reasonable evidence of bi-directional Granger causality between FDI and FPI, and FPI and overall FMD (FMD index), thus implying complementarity, as well as uni-directional Granger causality emanating from FDI to stock market capitalisation, FDI to domestic credit to the private sector by banks and also from FDI to overall financial market development in Botswana, Cote d’Ivoire, Egypt, Kenya, Mauritius, Morocco, Nigeria, South Africa, and Tunisia. In light of these findings, the policy implications are that African governments need to be conscientised on the benefits of financial market liberalisation and development. An open economy, complemented by adequate infrastructural and financial market development, plus appropriate regulation would play a significant role in attracting the type of international capital flow desired by the African host country’s level of economic development, without the concern of depleting other non-renewable natural resources. / GR2018

The current study examines the extent and magnitude by which global and regional shocks are transmitted to the volatility of returns in the stock markets of South Africa, Egypt, Nigeria, Botswana, Mauritius and Egypt. This is done so as to make inferences on the level of the domestic market‟s integration into the regional and world capital markets. By applying multivariate and univariate GARCH models, using weekly data from June 1995 to May 2010, the main empirical findings are threefold. Firstly, the volatility analytical framework finds statistically significant and time-varying volatility spillover effects from the regional and global markets to the South African market. Global shocks are generally stronger and account for up to 23.9 percent of the volatility of South Africa‟s equity market compared to weaker regional factors which account for less than 1 percent of domestic variance. Only in countries with strong bilateral trade and economic links with South Africa, such as Botswana and Namibia, is it found that regional factors are more dominant than global factors for domestic volatility. Compared to the other African markets, the joint influence of foreign shocks on domestic volatility is highest in South Africa and Egypt, two of Africa‟s largest and most developed markets. The results further demonstrate that for all the African markets the explanatory power of both regional and global factors for domestic volatility is not constant over time and tends to increase during turbulent market periods. Secondly, the analysis of the determinants of South frica‟s second moment linkages with the global market suggests that the volatility of the exchange rate plays a cardinal role in influencing the magnitude by which global shocks affect domestic volatility. The increased global integration in the second moments cannot be attributed to either increased trade integration, convergence in inflation rates or to convergence in interest rates between South Africa and the global markets. Lastly, tests were conducted to examine whether there have been contagion effects from the regional and global markets to South Africa from the 1997 Asian crisis and the 2007/8 global financial crisis. The results show no evidence of contagion during either the East Asian currency crisis or the recent global financial crisis to South Africa, while some African markets, such as Egypt, Mauritius and Botswana, exhibit contagion effects from either crisis. Overall, the empirical findings generally support the view that African markets are segmented both at the regional and global levels as domestic volatility is more influenced by local idiosyncratic shocks (the proportion not attributable to either global and regional factors). However, the volatility of South Africa, and to a lesser extent Egypt, remains relatively more open to global influence. This implies that the potential for gains from international portfolio diversification and the scope for success of policies aimed at the stabilisation of equity markets in these markets exist.

This thesis explores various aspects of long memory behaviour in African stock markets (ASMs). First, we examine long memory in both equity returns and volatility using the weak-form version of the efficient market hypothesis (EMH) as a criterion. The results show that these markets (largely) display a predictable component in returns; while evidence of long memory in volatility is mixed. In general, these findings contradict the precepts of the EMH and a variety of remedial policies are suggested. Next, we re-examine evidence of volatility persistence and long memory in light of the potential existence of neglected breaks in the stock return volatility data. Our results indicate that a failure to account for time-variation in the unconditional mean variance can lead to spurious conclusions. Furthermore, a modification of the GARCH model to allow for mean variation is introduced, which, generates improved volatility forecasts for a selection of ASMs. To further evaluate the quality of volatility forecasts we compare the performance of a number of long memory models against a variety of alternatives. The results generally suggest that over short horizons simple statistical models and the short memory GARCH models provide superior forecasts of volatility; while, at longer horizons, we find some evidence in favour of long memory models. However, the various model rankings are shown to be sensitive to the choice of error statistic used to assess the accuracy of the forecasts. Finally, a wide range of volatility forecasting models are evaluated in order to ascertain which method delivers the most accurate value-at-risk (VaR) estimates in the context of Basle risk framework. The results show that both asymmetric and long memory attributes are important considerations in delivering accurate VaR measures.

The study investigated the impact of regional financial integration on financial development with specific focus on the SADC protocols on trade and finance and investment. A total of 14 countries made up the study sample and the panel cointegration fully modified ordinary least squares model alongside the GMM were used to estimate the nature of impact. Study findings showed regional integration through the protocol on trade had a positive and significant impact on size and efficiency of the banking sector using the FMOLS estimator. GMM estimations for the same variables were largely insignificant. The results also showed a positive impact of the trade protocol on stock market capitalization but a negative and insignificant impact on stock turnover. The finance and investment protocol had a negative and insignificant relationship with broad money and a positive and significant impact on private sector credit for both estimators. The protocol was found to have had no significant effect on stock market development. The impact of the finance protocol was not significant enough to be detected in global integration measures, implying their implementation may not have significantly improved global integration for SADC countries. The study also uncovered the complimentary relationship between institutional quality and social capital in the financial development process and recommended the development of outward looking integration policies which focus on regional integration with the outside world. / Business Management / D. Com. (Business Management)