Browsing by Author "Othieno, Ferdinand"

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    Examining international parity relations between Kenya and Uganda
    (Canadian Center of Science and Education, ) Othieno, Ferdinand
    This paper analyses empirically the purchasing power parity, the uncovered interest parity and the real interest parity (Fisher parity) between Kenya and Uganda. The paper first tests the three parity relations using stationarity tests. Afterwards the study jointly models international parity conditions, namely PPP, RIP and UIP using a Cointegrated Vector Autoregressive approach. From the analysis of the individual parities, there is no evidence that the individual parities hold between the two countries except for RIP. On the other hand the joint VAR model establishes that the Kenya-Uganda inflation rates, interest rates, and the real exchange rate have followed a long-run equilibrium-correcting behavior. The joint Cointegrated VAR analysis reveals that all the endogenous variables explain more than 99.95% of the VAR model. This indicates a fast correction towards the long run equilibrium of the parity relations. Hence when the three parity relations are jointly modeled, it can be argued that Uganda has shown a tendency to converge to Kenya both in both nominal and real terms
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    Return volatility and equity pricing: a frontier market perspective
    (Social science research network, ) Othieno, Ferdinand; Chege, Theuri; Kodongo, Odongo
    Using both monthly and weekly return series between 1999:01 and 2013:12, we investigate the dynamics of stock returns and volatility in a Kenya’s fledgling equity market – the Nairobi Securities Exchange. Both the GARCH-in-mean and E-GARCH models yield positive and significant conditional variance parameters. We also find that shocks to equity returns of conditional volatility are highly persistent. Our results also indicate that conditional variance is driven more by the past conditional variance than it is driven by new disturbances. Finally, we find evidence of volatility clustering in the stock markets around major world and domestic economic episodes. Results are consistent with the inference that investors require larger risk premia on equities if they anticipate greater price volatility in future.
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    Return volatility and the pricing of equities at the Nairobi Securities Exchange
    Chege, Theuri; Othieno, Ferdinand; Kodongo, Odongo
    The study is an empirical test of asset pricing theory, which postulates that volatility is priced if a positive relationship exists between asset returns and their volatility. The asset under study is the Nairobi Securities Exchange 20-Share Index (NSE-20), which is assumed to be a welldiversified portfolio. Data from daily values of the NSE-20 were collected over a 15 year period from January 1999 to December 2013, and from these data, monthly returns were computed. Two models of the Auto-Regressive Conditional Heteroscedasticity-in-Mean (ARCH-M) family allowed the study to specify volatility conditionally. The study finds that monthly NSE-20 returns are not normally distributed and exhibit volatility clustering. A positive and significant relationship between risk and returns is found; indicating that volatility is priced. The study hopes to be useful to portfolio managers when carrying out a forward-looking valuation of a well-diversified portfolio of Kenyan stocks as well as other similar stocks based on market characteristics.
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    Semi-Markov credit risk modeling for a portfolio of consumer loans in the Kenyan banking industry
    Othieno, Ferdinand; Wagacha, Anthony
    Based on simulations of implied values for credit worthiness over a period of 5 years for 1000 consumers, we establish a case for the semi-markov models as a proxy for internal credit risk models for a portfolio of consumer loans. With ample calibration, we prove the robustness of the semi-markov models in forecasting probabilities of default and loss given default. With a view of credit risk as a reliability problem, we generate credit risk indicators as qualifications of adequacy of a loan portfolio. This informs prospective holding of capital based on forecast delinquencies as opposed to the current retrospective practice that relies on the trigger event of default. We use Monte-Carlo simulation techniques to generate consumer ratings and adopt this to the Merton model to derive the initial probability transition matrix. Initial consumer rating is in accordance with industry practice using a credit score sheet backed by the logit model. The banking credit function could espouse the study results to fulfill regulatory credit risk capital requirements for consumer loans in line with the Central Bank of Kenya Prudential Risk Guidelines or banks in other jurisdictions compliant with the Basel banking framework.