Lord Mensah, Anthony Q.Q. Aboagye and Nana Kwame Akosah
The purpose of this paper is to investigate whether asset allocation across various industries listed on the Ghana Stock Exchange (GSE) varies across different monetary policy…
Abstract
Purpose
The purpose of this paper is to investigate whether asset allocation across various industries listed on the Ghana Stock Exchange (GSE) varies across different monetary policy states.
Design/methodology/approach
This paper adopts the Markov Chain technique to split monetary policy into three different states. The authors further adopt the Markowitz portfolio optimization technique to find the minimum variance and optimum portfolio for the industries listed on the GSE.
Findings
The finding reveals a dynamic asset allocation, which varies the industry’s weight mix across the various monetary policy states enhance excess returns compared to the static asset allocation. Specifically, the authors find risk-return trade-off among industries listed on the GSE. Financial and Food and Beverage industries portfolios record high returns relative to the Government of Ghana 91-day Treasury bill. The Food and Beverage portfolio is the only portfolio that records relatively high excess returns across all the monetary policy states. The authors also find that, during expansionary state (high monetary policy rates) of the monetary policy, investors are to allocate about 69 and 30 percent of their investment into food and beverages and financials, respectively. Corner solution is found in the transient state where 100 percent of wealth is allocated to financial to obtain the optimum portfolio. The optimum portfolio in the contraction state assigns 52 percent to financials and 42 percent to manufacturing. In summary, the result supports the dependence of investors’ asset allocation decisions on monetary policy.
Practical implications
Therefore, the authors propose an investment strategy which is dynamic and takes into consideration the monetary policy states rather than static asset allocation which maintains the same industry weight mix over the investment period.
Social implications
In sum, the authors interpret the result as support for the dependence of investors’ asset allocation decisions on monetary policy. In Ghana, an increase in the monetary policy appears to support industries listed on the equity market. The result also gives knowledge about investors’ asset allocation decisions on the GSE, which is practical balanced source of information for investors’ risk and return choices. For a prudent monetary policy framework, the monetary policy committee should monitor industries listed on the GSE. The result from the analysis has also an implication for investors, portfolio managers and fund managers to consider the state of the monetary policy in Ghana when making investment decisions.
Originality/value
The study differs from earlier research on asset allocation by breaking new grounds on two levels. First of all, based on the notion that different industries have different exposures to monetary policy states, the authors extend the portfolios by grouping the equities listed on the GSE into their industrial sectors. Second, the authors examine how investors’ optimal portfolio allocation may change depending on the state of monetary policy.
Details
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The purpose of this paper is to appraise the stability of Ghana’s fiscal policy by assessing government’s reaction in the past to rising public debt over the last three decades…
Abstract
Purpose
The purpose of this paper is to appraise the stability of Ghana’s fiscal policy by assessing government’s reaction in the past to rising public debt over the last three decades.
Design/methodology/approach
Using quarterly data spanning 1990Q1-2013Q2, the study evaluated the mean reverting properties of Ghana’s public debt and also estimate the fiscal policy reaction function. The complementary estimation techniques include Pesaran et al. (2001) bound testing cointegration test, differencing method and also Granger two-step cointegration methods.
Findings
Using quarterly data from 1990Q1 to 2013Q2, the study found the fiscal policy to be unstable in the 1990s, necessitating the adoption of Heavily Indebted Poor Countries’ initiative in 2001. The fiscal situation however relatively stabilizes afterwards following the external debt relief in 2001. Nevertheless, the study reveals that the recent fiscal policy (since 2006) seems to be confronted with tremendous fiscal pressures, exacerbated by fiscal excesses during election cycles as well as excessive domestic and external borrowings. In addition, the economic growth-debt link was found to be weak, though debt appears to adversely affect economic growth.
Research limitations/implications
The study does not thoroughly explore the possibility of non-linear relationship between public debt and primary balance. Also, the result could be different using different data frequencies.
Practical implications
The state of government finance has implications on the monetary policy and economic growth prospects of an economy. As an inflation targeting central bank since 2002, a successful monetary policy implementation that reins in inflation requires fiscal policy that curtails fiscal volatilities originating from imprudent behaviour of government. Therefore, the looming fiscal pressures in recent times would impair the effective implementation of the inflation targeting framework by the central bank, and also retard economic growth as the bulk of these expenditures are usually recurrent in the case of Ghana.
Originality/value
This is the first paper to employ complementary econometric techniques to empirically evaluate fiscal sustainability in Ghana.
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Keywords
Ebere Ume Kalu, Augustine Chuck Arize, Sylvester Okechukwu Ilo, Ifeoma Ihegboro and Chiamaka Goodness Eze
This study investigated the interactive impact of global and domestic stock market variables on the depth of the financial system in Sub-Saharan African (SSA) countries from 1990…
Abstract
Purpose
This study investigated the interactive impact of global and domestic stock market variables on the depth of the financial system in Sub-Saharan African (SSA) countries from 1990 to 2018.
Design/methodology/approach
The study used the mean group and pooled mean group estimators for the dynamic heterogeneous panel.
Findings
The results provide strong statistical evidence that the depth of the financial system in SSA countries is influenced by a combination of local and international stock market indicators. While the local variables exert a positive influence, the global indicator tends to negatively affect the depth of the system, particularly the monetization ratio.
Practical implications
While the tendency of portfolio adjustments and reversal can be inferred, the study stresses the need for a more globalized approach to financial policy formulation and implementation even as the trend of global financializaton gets more robust and more profound.
Originality/value
This study is unique in that, unlike prior ones, it has extended the debate on the role of the stock market in financial deepening from a domestic to an international dimension. Financial policy making can be aided by the authors' findings through looking at the financial deepening-stock market linkage from both domestic and globalized perspectives.