Market Risk Instruments and Portfolio Inflows in African Frontier Economies
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Abstract
Description
Financial investments enable portfolio investors to earn above market
returns which do not come without risks. The African frontier markets (FMs) are
investigated here and this chapter brings into focus the determinants of portfolio
flows into these markets. The number of FEs in African investigated is six and two
key financial instruments are used as returns: stock market returns and interest rate
spread. Other variables used in the study include reserve liquidity, exchange rates
and national income. The method of estimation adopted is the Vector
autoregression with Granger causality. The results show that the all the variables
are significant with the portfolio inflows. Specifically, portfolio funds are income
chasing; the liquidity of reserves is also significant for every country among the FEs
to enjoy inflows of portfolio funds, impacting on the exchange rates. Stock market
returns is also highly significant in the Granger causality tests. Recommendations
made include the increase in productivity to increase income and exports in these
economies. In addition, African FEs must reduce interest rate margins to increase
real production and encourage bonds markets development and thus attract portfolio
investment into the sector rather than to concentrate all attention on the equities
market.
Keywords
H Social Sciences (General), HF Commerce