CAPÍTULO V: CONCLUSIONES Y RECOMENDACIONES
5.1.2 Conclusiones Específicas
Considering the methodologies used in this study, and the empirical results discussed in Chapter 6, this chapter outlines recommendations for future research about LSAPs and the Fed’s normalisation announcements on four key SA financial market variables.
Firstly, this study focussed on announcements strictly pertaining to LSAPs and the Fed’s normalisation of interest rates, and hence, did not consider measuring the impact of the Fed’s
forward guidance, explicitly. Quantifying the impact and effectiveness of the Fed’s forward
guidance separately to that of LSAPs and normalisation announcements would aid in better understanding abnormality in the four SA study variables over the study period. Moreover, forward guidance plays a pivotal role in monetary policy setting, forming an important aspect for future expectations of economic agents, giving additional weight to further research. Secondly, in terms of research limitations, using higher frequency data (hourly, minute, second) may improve the accuracy of assessing abnormality in asset price returns. Although this study used daily data due to availability constraints, an event’s impact on financial market variables diminishes the longer it is public knowledge, decreasing the market impact. Additionally, other financial market events in both the US and SA may occur on the same day as the Fed LSAP and normalisation announcements, potentially exacerbating or diminishing the announcement impact resulting from the Fed.
Thirdly, most of this study focuses on the Fed’s LSAP announcements, while a mere single interest rate hike of the Fed funds rate was considered in terms of its impact on the four SA study variables. Since the first interest rate hike at the end of 2015, the Fed has announced six more increases in the Fed funds rate, which were not included in this study, but are worth further exploration in terms of assessing their impact on the four SA study variables.
Lastly, while the 30-day estimation period of the event study methodology may have sufficed in meeting the minimum criteria, as suggested by the central limit theorem and satisfying normality assumptions, the use of a non-parametric event study estimation would serve as an appropriate alternative to the parametric method used in this study. This is because non- parametric estimation allows the functional form of a fit to data to be obtained in the absence of any guidance or theoretical constraints. Where events might overlap in periods of less than 30 days, the application of non-parametric estimation becomes beneficial to the researcher.
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Chapter 8: Conclusion
This minor dissertation set out to establish the pertinent effects of the Fed’s LSAP programme and interest rate normalisation, where the Fed undertook LSAPs in the wake of the GFC to stimulate falling aggregate demand and check undesirable inflationary pressures in the US economy. This was induced by consumers defaulting on their mortgage bonds resulting in large amounts of MBS’ values collapsing and drying up liquidity in asset markets across the
US – and their spill-over effects to SA financial market variables. The unconventional MP
decisions by the Fed created excess liquidity in global financial markets, which were channelled into EMs, like SA, as investors purchased EM financial assets, seeking higher yielding returns than in AEs. These portfolio flows, through global transmission channels, revealed market demand and supply pressures on local asset prices.
With respect to this argument, the main aim of this minor-dissertation was to investigate whether or not the Fed’s LSAPs, commonly known as QE, had exhibited an abnormal impact on the SA financial market since the Fed implemented LSAPs towards the end of 2008 and subsequently ended them in the latter part of 2014, and the start of normalisation of the Fed funds rate towards the latter part of 2015. More specifically, four key SA financial market variables were studied to assess if any abnormal effects prevailed, namely: the exchange rate (ZAR/$US), the SA 10-year government bond yield, the JSE ALSI, and the SA VIX. Simply, there was strictly one objective of this minor dissertation, but, this objective was met by two broader findings: firstly, arising from the main objective’s results, we evaluated the short-term predictability of the Fed’s unconventional MP decisions by analysing the SA financial market variables’ reactions to predict future unconventional MP actions by the Fed, using the event study methodology. Secondly, again through event study, the explicit objective was to
determine whether the Fed’s LSAPs and normalisation of MP exhibited, through FOMC
announcements, any abnormal impacts on the value of the four SA study variables and their returns. To establish the above statements, a methodical approach was developed through the process of a quantitative research model–event study, which involved an empirical study
of the impact of the Fed’s LSAPs and normalisation of MP using both statistical and
econometric techniques.
To accomplish the main objective, and the two outcomes that arose therefrom, the event study methodology was used to analyse the SA financial market’s ability to anticipate and predict the Fed's future MP decisions This was achieved by assessing each FOMC announcement date and the market’s ability to incorporate MP decisions into each one of the four SA study variables market value before and immediately after an event. On average, it was found that
49
market participants were largely and consistently unable to predict the Fed’s MP actions over the study period.
Secondly, the event study was again used to assess whether any abnormal impacts on the four SA study variables arose out of the result of the Fed’s LSAP program and more recently, the normalising of the Fed funds rate, during FOMC announcements. The event study evaluated the magnitude of both ARs and CARs of the exchange rate (ZAR/$US), the SA 10- year government bond yield, the JSE ALSI, and the SA VIX, over each FOMC announcement date.
The results of the event study analysis, with some exceptions, showed on average, that the Fed’s LSAPs and normalisation had a significant abnormal and cumulative abnormal impact on the market value of the four SA study variables over the study period. The event study results affirmed the previous finding where market participants holding one or all four SA study variables were inconsistent or had a high degree of inaccuracy, in predicting the Fed’s current and future MP over the study period. Hence, if predictability is weak or non-existent, then one would expect there to be relatively large price swings both to the up- and down-side in the value of the study variables.
Both findings of the empirical analysis show that financial market participants are unable to correctly predict MP decisions by the Fed on a consistent basis, and, an abnormal impact on the four SA study variables is evident. There are a few explanations that can explain the results found in Chapter 6. Firstly, on predictability, this type of unconventional MP was undertaken during a largely uncertain economic time, where the resultant shock of the GFC rippled across global markets, impacting on sentiment, asset prices, and market volatility. Even with the Fed communicating guidance with respect to LSAPs and normalisation, SA financial market variables showed large corrections in ARs before and after each FOMC announcement. In addition, with the implementation of this type of unconventional policy, it was mostly unknown whether the intended effects would prevail, and if so, what the impact would be on the US economy, and more broadly, the global economy. Since Japan recorded mixed results on the economic outcomes of its QEP, the Fed was mostly guided by a theoretical outcome at the time of implementation. Secondly, the Fed’s continuous LSAPs drove excess liquidity into US and global financial markets, which in turn found its way into EM assets, like those of the four SA study variables. This was particularly evident during FOMC announcements in which LSAPs and normalisation of MP were mentioned, and given their expected impact on asset prices, should they increase or decrease.
In conclusion, the results of the analysis in this minor-dissertation support the notion that on average, market participants were largely unable to predict the Fed’s unconventional MP. This
50
lead to an abnormal impact on SA financial market variables arising from the undertaking of LSAPs and the Fed’s more recent normalisation of MP.
51
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Appendix
A1. ARs of the ZAR/$US
A2. ARs of the SA 10-year government bond yield
A3. ARs of the JSE ALSI
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 1 8 15 22 29 36 43 50 57 Per ce n tFOMC announcement events t₀-3 t₀-2 t₀-1 t₀ t₀+1 -5 -4 -3 -2 -1 0 1 2 3 4 5 1 8 15 22 29 36 43 50 57 Per ce n t
FOMC announcement events t₀-3 t₀-2 t₀-1 t₀ t₀+1 -4 -3 -2 -1 0 1 2 3 4 5 6 1 6 11 16 21 26 31 36 41 46 51 56 Per ce n t
57
A4. ARs of the SA VIX
A5-A11. Event study results
-10 -5 0 5 10 15 20 1 8 15 22 29 36 43 50 57 Per ce n tFOMC announcement events t₀-3 t₀-2 t₀-1 t₀ t₀+1
Event Date
AR CAR J1-p valueJ2-p value AR CAR J1-p value J2-p value AR CAR J1-p value J2-p value AR CAR J1-p value J2-p value
t₀-3 -2.05 -2.05 -1.26 -1.26 4.69 4.69 -3.22 -3.22 t₀-2 1.18 -0.87 -1.48 -2.74 -0.7 3.99 1.5 -1.72 t₀-1 0.36 -0.51 -2.51 -5.26 -1.7 2.29 0.26 -1.45