Journal of Money, Investment and Banking

Issue 29
October, 2014

The Interactions between Monetary and Fiscal Policy Rules
Amr Algarhi

The paper focuses on the monetary and fiscal policy interaction as adopted in the EJ2000 model by Leith and Wren-Lewis (2000) and Woodford (1996). The impact of different shocks, including a temporary and autocorrelated consumption shock, a temporary fall in output supply and a positive shock to inflation, are examined under different interactions between monetary and fiscal policy. Furthermore, the paper investigates the change in the model properties if a proportion of consumers were credit constrained and how it affects the model together with a backward looking inflation.
JEL Classification: E21; E42; E52; E58;E62.
Keywords: Consumption shock; Fiscal policy; Inflation shock; Monetary policy; Phillips curve; Supply shock.

Do the Governance Performance and the Sovereign Debt Influence Market Discipline? The EMU's case under the New European Bail in Regime
Evangelos Vasileiou

The purpose of this paper is to examine the Market Discipline (MD) in the European Monetary Union's (EMUs) banking market. After the 2007's global crisis bursts, the EMU faces several economic and financial problems. Among those problems on the top are the Greek and the Cypriot issues. Several crucial European Union's decisions follow them, such as the "hair-cut" of the Greek debt and the "bail-in" in the Cypriot banking system. Few months later, Eurogroup decides that from now on the bail-in would be one of the main resolution measures. The poor governance performance and the increased sovereign risk are the main reasons for these problems, according to the EMU's officials. All these factors signal the beginning of a new banking era. Using consolidated data from 2004-11 we provide empirical evidence that in the EMU the MD is superficial, if we take into consideration only the banking variables. Moreover, the governance and the public debt should be included in the new MD regime, because the new era may demands a new MD approach.
JEL Classification Numbers: G21, G28, H63, H83, 052
Keywords: market discipline, deposit insurance, governance, sovereign debt, European Monetary Union

Finance-Entrepreneurial Involvement Nexus: Unravelling the Role of Personal Competences
Michael Adusei, Kwame Owusu Kwateng and Nehemia Uzera

The paper investigates the moderating impact of personal competences on the access to finance-enterprise creation nexus with data from ten (10) Sub-Saharan African (SSA) countries collected by Global Entrepreneurship Monitor (GEM). The study finds that an adult in SSA who has access to finance is likely to start a business. The study also finds that four personal competences (self-efficacy, opportunity perception, role modeling and risk propensity) do not have joint and several moderating effects on the access to finance-enterprise creation nexus. The study, therefore, concludes that the propensity of an adult in SSA who has access to finance to start a business may not be contingent on his or her personal competences.
Keywords: Access to finance, entrepreneurial involvement, personal competences, Sub-Saharan Africa

Backtesting VaR Violations, Be-ALAM Regression and Internal Models of Portfolio Variance Forecasting
Shahid Anjum

Portfolio risk can either be calculated either from variance-covariance approach, full valuation approach or by combining these two approaches. Various dimensions play its part in the calculation of portfolio risk including simplification of portfolio positions and reduction in the number of factors either by bucketing or mapping, inputing the risks from new information or from trading strategies into factor models to estimate portfolio returns and estimation of conditional variance and correlations among assets using either single index or portfolio volatility models. The conditional variance and correlations are used to calculate value-at-risk (VaR) threshold. In order to check the quality of outputs of volatility models and VaR threshold forecasts backtesting is used in order to assess the VaR violations. One of the various ways to evaluate the portfolio variance and forecasts of the VaR thresholds is the linear regression approach where volatility forecasts are regressed on the realized volatility. In order to compare the results from various volatility models based on this regression approach we have used a multi criteria evaluation based 'best Auto Logic AHP-mated (Be-ALAM) regression' approach to rank the results of various regressions. Finally, Be-ALAM regression results have been compared with VaR violation results in order to assess the best volatility model for calculating the bank's capital charge with reduced Basel penalties.
Keywords: Basel Penalties, Portfolio Volatility Models, Conditional Variance and VaR, Analytical Hirarechy process

The Response of Stock Price Movements to Dividend Payments on the Ghana Stock Market: An Empirical Assessment
Joseph Magnus Frimpong and Gideon Boako

The signaling hypothesis posits that dividend change announcements are positively related with share price movements and future changes in earnings. However, Miller and Modigliani (1961) contends that, dividend policy is irrelevant in arriving at a firm value, if the capital market is perfect. The purpose of this paper is to assess the potency of the dividend irrelevance theory on the Ghana stock market by using the Johansen cointegration methodology on daily data of dividends, earnings and stock prices from January 2011 to December 2013. The results establish that equity price movements in Ghana are not in line with dividend payments. However, the incorporation of earnings in the cointegration model provides varying results. The findings imply that equity price movements in Ghana are not responsive to dividend news. The paper presents critical policy implications for capital structure decisions of firms listed on the Ghana stock exchange.
Keywords: Composite Index, dividend irrelevance theory, Johansen cointegration, equity prices.

Market Reaction to Dividend Announcements on the Ghana Stock Exchange
Zangina Isshaq and Godfred A. Bokpin

In this paper we study stock price response to dividend announcements on the Ghana Stock Exchange over the period 2009 to 2012. Our results generally show a negative market response to dividend announcements between -0.52% and -1.37% in terms of cumulative average abnormal returns and -0.52% and -1.47% for buy-and-hold returns. The statistical significance is generally not consistent. The only consistency in terms of statistical tests is for results based on a value-weighted market return benchmark for event windows in (-2, +2) and (-5, +5) around the event date. We did not find a statistically significant market reaction to dividend changes, increases or decreases. The indicative correlations are negative for dividend increases and positive for dividend decreases.

The New Keynesian Model: An Empirical Application to the Euro Area Economy
Ricardo Barradas

This paper empirically applies the New Keynesian Model to the euro area's economy during the period from the first quarter of 1999 to the last quarter of 2008, which is consistent with the scant empirical evidence on this Dynamic Stochastic General Equilibrium model. The New Keynesian Model is estimated using the Generalized Method of Moments, since the model denote hybrid features including backward and forward looking behaviours by economic agents and elements with rational expectations. Although this method of estimation may present some limitations, the New Keynesian Model seems to describe reasonably well the evolution of economic activity, the inflation rate and monetary policy in the euro area. Against this backdrop, the New Keynesian Model may provide an important tool for aiding the governments of euro area countries and the European Central Bank in the adoption and implementation of its policies over time.
Keywords: New Keynesian Model, IS Curve, Phillips Curve, Taylor Rule, Generalized Method of Moments, Euro Area

Does Market Differentiate Between Sukuk and Bonds?
Meysam Safari and Mohamed Ariff

Sukuk securities have similar features with conventional bonds. The financial press has, however, inappropriately referred to Sukuk as Islamic bonds. This paper investigates Sukuk securities empirically by first examining the yields to maturities of Sukuk securities and conventional bonds of various issuers and maturities. Tests of differences in performance of the two classes of securities and Granger causality tests substantiate that these securities are different. This paper identifies some significant differences between the yield curves of Sukuk securities and those of conventional bonds of the same issuers for the same term and rating. Results show significant differences between the average yields of Sukuk and those of conventional bonds with the same quality and term issued by the same issuers from 2005 to 2014. Granger causality tests confirm that the yields of bonds do not Granger-cause the yields of Sukuk, verifying no causality between the two. There is strong empirical evidence that the two types of debt instruments are not the same. This prompts re-examination of investment advisory and valuation methodology currently applied in the Sukuk industry of 14 capital markets.
Keywords: Sukuk, Bond, Yield curve, Yield to maturity, Islamic finance, Islamic bond, fixed income finance, Securitization, Yield spread, Malaysia