MSc (Statistics) / Department of Statistics / Over the years researchers have been modeling inflation rate in Ghana using linear models such as Autoregressive Integrated Moving Average (ARIMA), Autoregressive Moving Average (ARMA) and Moving Average (MA). Empirical research however, has shown that financial data, such as inflation rate, does not follow linear patterns. This study seeks to model and forecast inflation in Ghana using nonlinear models and to establish the existence of nonlinear patterns in the monthly rates of inflation between the period January 1981 to August 2016 as obtained from Ghana Statistical Service. Nonlinearity tests were conducted using Keenan and Tsay tests, and based on the results, we rejected the null hypothesis of linearity of monthly rates of inflation. The Augmented Dickey-Fuller (ADF) was performed to test for the presence of stationarity. The test rejected the null Hypothesis of unit root at 5% significant level, and hence we can conclude that the rate of inflation was stationary over the period under consideration. The data were transformed by taking the logarithms to follow nornal distribution, which is a desirable characteristic feature in most time series. Monthly rates of inflation were modeled using threshold models and their fitness and forecasting performance were compared with Autoregressive (AR ) models. Two Threshold models: Self-Exciting Threshold Autoregressive (SETAR) and Logistic Smooth Threshold Autoregressive (LSTAR) models, and two linear models: AR(1) and AR(2), were employed and fitted to the data. The Akaike Information Criterion (AIC) and the Bayesian Information Criterion (BIC) were used to assess each of the fitted models such that the model with the minimum value of AIC and BIC, was judged the best model. Additionally, the fitted models were compared according to their forecasting performance using a criterion called mean absolute percentage error (MAPE). The model with the minimum MAPE emerged as the best forecast model and then the model was used to forecast monthly inflation rates for the year 2017. The rationale for choosing this type of model is contingent on the behaviour of the time-series data. Also with the history of inflation modeling and forecasting, nonlinear models have proven to perform better than linear models. The study found that the SETAR and LSTAR models fit the data best. The simple AR models however, out-performed the nonlinear models in terms of forecasting. Lastly, looking at the upward trend of the out-sample forecasts, it can be predicted that Ghana would experience double digit inflation in 2017. This would have several impacts on many aspects of the economy and could erode the economic gains i made in the year 2016. Our study has important policy implications for the Central Bank of Ghana which can use the data to put in place coherent monetary and fiscal policies that would put the anticipated increase in inflation under control.

The main objective of the study was to determine the exchange rate volatility regime for carry trade profitability when using the South African Rand as the target currency. The study used the Logistic Smooth Transition Regression (LSTR) model to test the uncovered interest rate parity (UIP). The Sharpe ratio and the risk adjusted forward premium were used as the transition variables. The transition variable is a function of the transition function, which is used to determine the regime for the UIP. The LSTR model is characterised by three regimes, i.e. the lower regime, the middle regime and the upper regime. The LSTR model was tested for the short-term forward rate maturity of less than one year. The results show that the UIP hypothesis holds in the middle regime for the Rand/USD and the Rand/GBP when using the Sharpe ratio as the transition variable. Meanwhile, the UIP hypothesis does not hold for the Rand/Yen when using the Sharpe ratio as the transition variable for the forward rate maturity of one month, and it does hold for other short-term forward rate maturity of less than one year. The results for the risk adjusted forward premium as the transition variable show that the UIP hypothesis does not hold for all three currencies at various short-term forward rate maturities of less than one year. The research provides the following contributions to new knowledge: (1) Uncovered interest parity hypothesis holds in the middle regime for all periods for the Rand/USD and the Rand/GBP when using the Sharpe ratio as the transition variable with a short-term forward rate maturity of less than one year. (2) Currency carry trade profit taking for the Rand/USD and the Rand/GBP can be achieved in the upper regime. (3) The results for the Rand/Yen are mixed, in that the UIP hypothesis does not hold for other crisis periods as a result of negative Sharpe ratios. However, for the calm periods, UIP hypothesis holds in the middle regime for the Rand/Yen for short-term forward rate maturity of more than one month but less than one year when using the Sharpe ratio as the transition variable. The overall contribution of this study is that for the South African Rand as the target currency, the UIP hypothesis holds for the short-term horizon when using the Sharpe ratio as the transition variable and that this mostly depends more on currency than on horizon. Contrary to other researchers who found that the UIP holds in the long-term maturity with higher Sharpe ratios in the upper regime, this study proved that the UIP holds in the short-term maturity horizon. / Business Management / D.B.L.

The main objective of the study was to determine the exchange rate volatility regime for carry trade profitability when using the South African Rand as the target currency. The study used the Logistic Smooth Transition Regression (LSTR) model to test the uncovered interest rate parity (UIP). The Sharpe ratio and the risk adjusted forward premium were used as the transition variables. The transition variable is a function of the transition function, which is used to determine the regime for the UIP. The LSTR model is characterised by three regimes, i.e. the lower regime, the middle regime and the upper regime. The LSTR model was tested for the short-term forward rate maturity of less than one year. The results show that the UIP hypothesis holds in the middle regime for the Rand/USD and the Rand/GBP when using the Sharpe ratio as the transition variable. Meanwhile, the UIP hypothesis does not hold for the Rand/Yen when using the Sharpe ratio as the transition variable for the forward rate maturity of one month, and it does hold for other short-term forward rate maturity of less than one year. The results for the risk adjusted forward premium as the transition variable show that the UIP hypothesis does not hold for all three currencies at various short-term forward rate maturities of less than one year. The research provides the following contributions to new knowledge: (1) Uncovered interest parity hypothesis holds in the middle regime for all periods for the Rand/USD and the Rand/GBP when using the Sharpe ratio as the transition variable with a short-term forward rate maturity of less than one year. (2) Currency carry trade profit taking for the Rand/USD and the Rand/GBP can be achieved in the upper regime. (3) The results for the Rand/Yen are mixed, in that the UIP hypothesis does not hold for other crisis periods as a result of negative Sharpe ratios. However, for the calm periods, UIP hypothesis holds in the middle regime for the Rand/Yen for short-term forward rate maturity of more than one month but less than one year when using the Sharpe ratio as the transition variable. The overall contribution of this study is that for the South African Rand as the target currency, the UIP hypothesis holds for the short-term horizon when using the Sharpe ratio as the transition variable and that this mostly depends more on currency than on horizon. Contrary to other researchers who found that the UIP holds in the long-term maturity with higher Sharpe ratios in the upper regime, this study proved that the UIP holds in the short-term maturity horizon. / Business Management / D.B.L.