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Testing the Asymmetric Effects of Financial Conditions in South Africa: A Nonlinear Vector Autoregression Approach

Author

Listed:
  • Mehmet Balcilar

    () (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus, via Mersin 10, Turkey)

  • Kirsten Thompson

    () (Department of Economics, University of Pretoria)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Renee van Eyden

    () (Department of Economics, University of Pretoria)

Abstract

The negative consequences of financial instability for the world economy during the recent financial crisis have highlighted the need for a better understanding of financial conditions. We use a financial conditions index (FCI) for South Africa previously constructed from 16 financial variables to test whether the South African economy responds in a nonlinear and asymmetric way to unexpected changes in financial conditions. To this end, we make use of a nonlinear logistic smooth transition vector autoregressive model (LSTVAR), which allows for a smooth evolution of the economy, governed by a chosen switching variable between periods of high and low financial volatility. We find that the South African economy responds nonlinearly to financial shocks, and that manufacturing output growth and Treasury Bill rates are more affected by financial shocks during upswings. Inflation responds significantly more to financial changes during recessions.

Suggested Citation

  • Mehmet Balcilar & Kirsten Thompson & Rangan Gupta & Renee van Eyden, 2014. "Testing the Asymmetric Effects of Financial Conditions in South Africa: A Nonlinear Vector Autoregression Approach," Working Papers 201414, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201414
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    References listed on IDEAS

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    Cited by:

    1. repec:ipg:wpaper:2014-492 is not listed on IDEAS
    2. repec:ipg:wpaper:2014-474 is not listed on IDEAS
    3. Paetz, Michael & Gupta, Rangan, 2016. "Stock price dynamics and the business cycle in an estimated DSGE model for South Africa," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 166-182.
    4. repec:ipg:wpaper:2014-471 is not listed on IDEAS
    5. repec:ipg:wpaper:2014-562 is not listed on IDEAS
    6. repec:ipg:wpaper:2014-516 is not listed on IDEAS
    7. repec:ipg:wpaper:2014-462 is not listed on IDEAS
    8. repec:eee:finana:v:51:y:2017:i:c:p:69-81 is not listed on IDEAS
    9. Kim, Joseph H.T. & Li, Johnny S.H., 2017. "Risk-neutral valuation of the non-recourse protection in reverse mortgages: A case study for Korea," Emerging Markets Review, Elsevier, vol. 30(C), pages 133-154.
    10. Rangan Gupta & Jun Ma & Marian Risse & Mark E. Wohar, 2017. "Common Business Cycles and Volatilities in US States and MSAs: The Role of Economic Uncertainty," Working Papers 201766, University of Pretoria, Department of Economics.
    11. repec:ipg:wpaper:2014-548 is not listed on IDEAS
    12. Mehmet Balcilar & Rangan Gupta & Renee van Eyden & Kirsten Thompson, 2015. "Comparing the Forecasting Ability of Financial Conditions Indices: The Case of South Africa," Working Papers 15-06, Eastern Mediterranean University, Department of Economics.
    13. repec:ipg:wpaper:2014-475 is not listed on IDEAS
    14. Alain Kabundi & Asi Mbelu, 2017. "Working Paper – WP/17/02- Estimating a time-varying financial conditions index for South Africa," Papers 8008, South African Reserve Bank.

    More about this item

    Keywords

    Financial conditions index; nonlinear vector autoregression; LSTVAR; asymmetry;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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