published_or_final_version / Business Administration / Master / Master of Business Administration

Ph.D. / This thesis investigates the impact of domestic and foreign financial crises on volatility dynamics in South Africa. In a sample ranging from January 1994 to March 2009, Chapter 2 provides empirical support for the theory that domestic currency crises are associated with significant structural changes in daily exchange rate volatility. Speciacally, crisis periods coincide with large positive shifts in unconditional variance. Using this fact, we propose a new method - the structural change generalised conditional heteroskedasticity, or SC-GARCH, model - for identifying precise start- and end-dates for crises. Chapter 3 studies volatility transmission within SA from October 1996 to June 2010. Using a generalised version of the vector autoregressive (VAR) approach, time-varying and bidirectional volatility spillover indices are esti- mated for domestic currency, bond and equity markets. The results identify equities as the primary source of volatility transfer to other asset classes. At di erent points in time, spillovers are responsible for anywhere between 7.5 and 65 percent of system-wide volatility. Local maxima in spillover magni- tudes are estimated during domestic, as well as foreign crisis periods. Chapter 4 estimates time-varying comovement between SA and world volatilities during the period from 1994 to 2008. A dynamic factor model (FM) is used to extract three latent global volatility factors from a data panel which is representative of the world equity market portfolio. Relative to most other emerging markets, the global factors are poor predictors of volatility in SA. However, SA's comovement with global volatility increases sharply in response to emerging market crises in Asia (1997-8) and Russia (1998). The global factors are also important determinants of domestic volatility during the latter stages of the US subprime crisis (2007-8). Chapter 5 proposes the factor-augmented VAR as a parsimonious model for the transmission of foreign volatility shocks to SA equities. We compare international volatility transmission resulting from crises in Asia (1997-8) and the US (2007-8). Although the US crisis has a larger impact on the world equity market, the Asian shock leads to more dramatic increases in volatility in emerging economies, including SA.

This project describes the underlying principles of Modern Portfolio Theory, the Capital Asset Pricing Model (CAPM), and multi-factor models in detail, explores the process of constructing optimal portfolios using the Modern Portfolio Theory, estimates the expected return and covariance matrix of assets using CAPM and multi-factor models, and finally, applies these models in real markets to analyze our portfolios and compare their performances.

Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2013. / The Capital Asset Pricing Model (CAPM) is widely used in estimating cost of equity capital. CAPM relies on historical data to estimate beta which is subsequently used to calculate ex-ante returns. Several authors have highlighted anomalies with CAPM and have proposed various models that capture these anomalies. This study investigates the Market Derived Capital Asset Pricing Model (MCPM), an ex-ante model that uses traded option premium prices and implied volatility to determine ex-ante equity risk premium used in estimating cost of equity capital. The implied volatility captures future market risk expectation of a firm. This is of importance to corporate managers who need to establish appropriate hurdle rates when making capital budgeting decisions. Additionally, investors need to determine expected returns based on future risk outlook of an investment. Using data from the South African Johannesburg Stock Exchange (JSE) listed firms’, a comparison of cost of equity capital estimates was done using CAPM, Fama and French Three-Factor Model and MCPM. The results show MCPM’s yields higher estimates compared to CAPM and Three-Factor Model.

The purpose of this research report is to determine whether the use of a Downside risk variable – the D-Beta – is more appropriate in the emerging market of South Africa than the regular Beta used in the CAPM model. The prior research upon which this report expands, performed by Estrada (1999; 2002; 2005), focuses on using Downside risk models mainly at an overall country (market) level. This report focuses exclusively on South Africa, but could be applicable to various other emerging markets. The reason for researching this topic is simple: Investors – not just in South Africa, but all across the world – think of risk differently to the way that it is defined in terms of modern portfolio theory. Beta measures risk by giving equal weight to both Upside and Downside volatility, while in reality, investors are a lot more sensitive to Downside fluctuations. The Downside Beta takes into account only returns which are below a certain benchmark, thereby allowing investors to determine a share’s Downside volatility. When the Downside Beta is included as the primary measure of systematic risk in an asset pricing model (such as the D-CAPM), the result is a model which can be used to determine cost of equity, and make forecasts about share returns. The results of this research indicate that using the D-CAPM to forecast returns results in improved accuracy when compared to using the CAPM. However, when comparing goodness of fit, the CAPM and the D-CAPM are not significantly different. Even with this conflicting result, this research shows that there is indeed value in using the D-Beta in South Africa, especially during times of economic downturn.

The Capital Asset Pricing Model (CAPM), as introduced by Markowitz (1952), Sharpe (1964), Lintner (1965), Black (1972) and Mossin (1966), offers powerful and intuitively pleasing predictions about the risk and return relationship that is expected when investing in equities. Studies on the empirical strength of the CAPM such as Fama and French (1992), however, indicate that the model does not reflect the share return actually obtained on the equity market. Attempting to improve the model, Fama and French (1993) enhanced the original CAPM by incorporating other factors which may be relevant in predicting the return on share investments, specifically, the book – to – market ratio and the market capitalisation of the entity. Carhart (1997) further attempted to improve the CAPM by incorporating momentum analysis together with the 3 factors identified by Fama and French (1993). This research report empirically evaluates the accuracy of the above three models in calculating the cost of equity on the Johannesburg Stock Exchange over the period 2002 to 2012. Portfolios of shares were constructed based on the three models for the purposes of this evaluation. The results indicate that the book-to-market ratio and market capitalisation are able to add some robustness to the CAPM, but that the results of formulating book – to – market and market capitalization portfolios is highly volatile and therefore may lead to inconsistent results going forward. By incorporating the short run momentum effect, the robustness of the CAPM is improved substantially, as the Carhart model comes closest to reflecting what, for the purposes of this study, represents the ideal performance of an effective asset pricing model. The Fama and French (1993) and Carhart (1997) models therefore present a step forward in formulating an asset pricing model that will hold up under empirical evaluation, where the expected cost of equity is representative of the total return that can be expected from investing in a portfolio of shares. It is however established that the additional factors indicated above are volatile, and this volatility may influence the results of a longer term study.

This paper describes our work pricing options in the binomial model on leveraged exchange traded funds (ETFs) with three different approaches. A leveraged exchange traded fund attempts to achieve a similar daily return as the index it follows but at a specified positive or negative multiple of the return of the index. We price options on these funds using the leveraged multiple, predetermined by the leveraged ETF, of the volatility of the index. The initial approach is a basic time step approach followed by the standard Cox, Ross, and Rubinstein method. The final approach follows a different format which we will call the Trigeorgis pricing model. We demonstrate the difficulties in pricing these options based off the dynamics of the indices the ETFs follow.

Abstract not available

"August 1998" Bibliography: leaves 74-78. The relationship between the returns to a stock, and ratio of book equity to market equity of the firm, are tested for the Australian stock market, and statistically significant evidence is found in support if the :book to market effect". Several tests are performed to determine whether this return premium is the result of additional risk or market inefficiency. No evidence is found to suggest that high book-to-market stocks are associated with additional risk, and only weak evidence is found to suggest that return premium is a result of investor over-reaction. An alternative explanation IS offered, relying on the dynamic behavior of firms and the process by which investors value the stocks of these firms.

Thesis (Ph. D.)--Dept. of Economics and Social Sciences Consortium. University of Missouri--Kansas City, 2006. / "A dissertation in economics and social sciences." Advisor: L. Randall Wray. Typescript. Vita. Title from "catalog record" of the print edition Description based on contents viewed Dec. 19, 2007. Includes bibliographical references (leaves 422-452). Online version of the print edition.