MSc.MF Theses and Dissertations (2017)

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    Portfolio optimization in the Kenyan stock market: a comparison between mean-variance optimization and threshold accepting
    (Strathmore University, 2017) Masese, Josephine Mokeira
    The Mean-Variance Optimization (MVO) model has been used in asset allocation problems since the inception of Modern Portfolio Theory in 1952. Several improvements and alternatives to MVO have been suggested and used since then. These include adding constraints to the traditional MVO model, using alternative risk measures and use of non risk-reward models. This study seeks to compare this risk-reward model against the Threshold Accepting model, which is a general optimization model, in portfolio selection in the Kenyan stock market to establish optimal stock portfolios to be held by investors in The Nairobi Securities Exchange (NSE). A comparison is done between the two models by measuring their performance using the following performance ratios: Sharpe Ratio, Sortino Ratio and Information Ratio using 29 stocks in the NSE from 1998 - 2016. Using portfolio performance ratios, it is concluded that the Threshold Accepting (TA) model outperforms the Mean-Variance Optimization model but the latter is observed as a more consistent model. The TA model has portfolios with generally more superior returns relative to the risk taken for the full period; however, this is not consistent over varying time estimates. This observation implies that attention should be given to the TA model rather than the classical MVO approach with the aim of improving optimal portfolio selection.
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    Modeling SME credit ratings using non-homogenous backward semi-Markovian approach
    (Strathmore University, 2017) Magarita, Sara Muya
    Considering the growth in SME lending in Kenya and the obvious risks it posses to the banking sector, we establish a credit risk model that is responsive to the jumps in the economy. This is based on simulation of implied values of credit worthiness over a period of 12 months for 1000 SMEs, in which case we establish a case for the discrete time non-homogeneous semi-Markov approach as a proxy for internal rating model for a portfolio of SME loans. While viewing credit risk as a reliability issue, the model provides a credit indicator which gives a prospective measure of credit risk for an SME portfolio. Banks seeking to comply with the new IFRS9 guidelines can espouse this model to adequately measure impairment of financial instruments.
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    Calibration of vasicek model in a hidden markov context: the case of Kenya
    (Strathmore University, 2017) Chelimo, John Kigen
    This dissertation calibrates the Vasicek term-structure model to the evolution of interest rate dynamics in Kenya. This is done for both a single-state and a multi-state model using state estimated under a Hidden Markov Model (HMM). The findings of this paper provide a starting point for the management of the risk posed by interest rate-dependent instruments.The Vasicek model is calibrated using monthly observations of the 91-day treasury bill rate from September 1994 to July 2014 as a proxy for the short rate. Key results show an increase in the mean reversion parameter with an increase in the number of states, suggesting higher stability of states. The volatility is observed to move independently of the level of the interest rate,supporting the idea that risk is not necessarily a function of the level of the interest rate but rather related to the inherent variability of rates in a particular state. Findings from this parameter estimation provide support for interest rate models that incorporate regime switches.