MSc.MF Theses and Dissertations (2021)
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- ItemModelling and forecasting of crude oil price volatility: comparative analysis of volatility models(Strathmore University, 2021) Ng’ang’a, Faith WacukaThis study aims at providing an in-depth analysis of forecasting ability of different GARCH models and to find the best GARCH model for VaR estimation for crude oil. The VaR forecasting performance of GARCH-type models are analyzed and compared in a long horizon; based on the Kupiecs POF-test and Christoffersens interval forecast test as well as a Backtesting VaR Loss Function. Crude oil is one of the most important fuel sources and has contributed to over a third of the world’s energy consumption. Oil shocks have influence on macroeconomic activities through various ways. Sharp oil price changes delay business investment because they raise uncertainty thus reducing aggregate output for some time. Modelling and forecasting of crude oil prices plays a significant role in supporting policy and decision making in the economy. Successive developments of models used provide opportunities to analyse crude oil market in depth and improve the accuracy of oil price forecasting. The study uses Brent Crude Oil prices data over a period of ten years from the year 2011 to 2020. The study finds that the IGARCHT distribution model is the best model out of the five models for VaR estimation based on LR.uc Statistic (0.235) and LR.cc Statistic (0.317) which are the least among the values realized. ME and RMSE for the five models used for forecasting have negligible difference. However, the IGARCH model stands out with IGARCH- T-distribution being the best out of the five models in this study with ME of 0.0000963591 and RMSE of 0.05304335. We therefore conclude that the IGARCH- T distribution model is the best model out of the five models used in this study for forecasting Brent crude oil price volatility as well as for VaR estimations.
- ItemModelling the relationship between spot and futures prices: an empirical analysis of the South African Power Pool(Strathmore University, 2021) Mutembei, Kellyjoy MakenaThis study investigates the relationship between electricity spot and future prices in the South African Power Pool (SAPP). The objectives of the study included investigating whether forward prices in the SAPP are a true and unbiased estimate of the observable spot prices by determining whether or not a forward premium exists in the market. Investigating whether the forward premium (if it exists) can be explained by the behaviour of spot prices in the market in the period preceding delivery and lastly whether current future prices in the SAPP can be used to predict future spot prices in the market. The study used daily electricity spot prices in the SAPP for the period between April 1, 2017 and January 31, 2021 and electricity futures price data for weekly and monthly contracts during the same period. Relying on methodologies highlighted in the expectation hypothesis to describe the relationship between spot and futures prices, results indicate the existence of positive significant premiums in the market for the sample period. The premiums decrease with increasing maturity with the value of relative forward premiums ranging between 1.23 USD/MWh for peak weekly contracts to 0.46 USD/MWh for peak monthly contracts. Power purchasers in the SAAP are on average incurring a cost that inflates their cost of power by 0.24% to 1.23% depending on the hedging strategy they adopt and type of contracts they select. To explain the risk premia, the study followed methodologies highlighted in the General Equilibrium Model. Ordinary Least Square (OLS) regression results for forward premia modelling suggests that for some of the contracts in the SAPP, forward premiums can be at least partially explained by the mean, variance, standard deviation and skewness of the spot prices in the period preceding delivery. Particularly, the premiums have a negative relationship with average spot prices and a positive relationship with skewness. This implies that the higher the average spot price level, the lower the likelihood of overestimating future prices thus the lower the premium. Additionally, the higher the probability of upward price spikes, the higher the futures price thus the higher the premium. Lastly, to investigate forecasting ability of electricity futures in the SAPP, the study relied on the fundamentals of futures pricing suggested in the expectation hypothesis. Results reveal that future’s prices at the SAPP do not contain significant forecasting power over future spot prices in the SAPP. They reveal that variations in the forward premiums in the market are attributable to time varying risk premiums. The SAPP to a large extent relies on coal and nuclear power for electricity generation thus this could explain the reason why results led to the conclusion of the existence of time varying risk premiums.
- ItemEmpirical performance of alternative risk measures in portfolio selection - the case of South African stock market(Strathmore University, 2021) Macharia, RichardPortfolio selection is the process of apportioning capital to a finite number of assets given the wider set of all investment options. The decision of best combination of assets to invest in is the subject of debate among practitioners and researchers alike. Individuals face a multitude of constraints when making allocation decisions thus their patterns of investing are wildly different. However, economists have studied asset price patterns for long enough to be able to pick out aggregate patterns and develop a theory of decision making: Utility Theory.
- ItemA Comparative study on mathematical models for interest rate dynamics: a Kenyan case study(Strathmore University, 2021) Maina, Hudson MwangiThis dissertation calibrates equilibrium one-factor short-term interest rate models to the evolution of interest rate dynamics in Kenya. The aim of the study is to find out which one-factor short-rate model best captures the dynamics of the short-term interest rate in Kenya. Additionally, the study aims to evaluate the relationship between conditional volatility of interest rate changes and the level of interest rate. The findings of this study provide a basis for valuation of contingent claims and hedging of interest rate risk. The data used in the study was obtained from the Central Bank of Kenya (CBK) website 1 for the period between January 2005 to July 2016. Since the short-term interest rate is unobservable in the market the 91-day Treasury Bill (TB) rate was used as its proxy. The Generalized Method of Moments (GMM) estimation technique was used to obtain the parameters for all the models under study. Key results showed that there is weak evidence of mean reversion for all the models evaluated. Furthermore, it was established that there exists a positive relationship between interest rate volatility and the level of interest rate. The best performing model from the study is determined to be the Chan, Karolyi, Longstaff and Sanders (CKLS) model which allows the volatility of interest rate changes to be highly dependent on the level of the interest rate. This model also has the best volatility forecasting ability among the models under study. It is therefore recommended to interest rate policy makers for use in their work.
- ItemSavings and Credit Co-operative Societies as investment vehicles to enhancing affordable housing: a case of Kenyan SACCOs(Strathmore University, 2021) Wambui, David NyagaThe study seeks to explore whether SACCOs can profitably invest in affordable housing through special-purpose investment vehicles such as REITs. The ultimate goal is to increase the domestic funding of the affordable housing agenda. To carry out the study, we built a hypothetical portfolio for the SACCOs using three asset classes namely: Treasury Bonds, Treasury Bills, and seven stocks from the Nairobi Securities Exchange with the best Sharpe ratio and calculated the expected return and standard deviation of that portfolio. We then added real estate (REITs) as the fourth asset class and calculated the expected return and standard deviation of the portfolio and compared the results. From the research, we find that though SACCOs can reduce the housing finance deficit as evidenced by their huge asset base, it is not profitable for them to invest in housing through REITs as this declines their portfolio return. However, these results do not bar them from investing directly in housing since they can offer housing loans to their members in their bid to provide affordable housing and in return earn interests from those loans.