Abstract
Abstract : Following a market failure from the over-issue of mortgage-backed securities to sub-prime borrowers who were unable to service their debt obligations, systemic risks quickly spread across the financial and real sectors of the United States of America’s economy in 2007/08, resulting in significant detractions in economic activity and undesirable downside price pressures. In response, the Federal Reserve implemented an unconventional monetary policy programme as the central bank’s traditional instruments were deemed ineffective. The objective of the programme was to lower long-term interest rates and restore liquidity to the financial sector. Lower long-term rates would in-turn stimulate economic activity and subsequently boost price pressures. However, with ample liquidity available and low yielding assets in the United States of America, investors turned to emerging market economies like South Africa, in search of yield. Investors channelled capital through the exchange rate, into bonds and equities, while decreasing market volatility. It is especially important to understand the impact of these actions on South African financial market variables each time the Federal Reserve makes announcements regarding its unconventional easing programme and normalisation of interest rates, should abnormal market impacts arise. In this minor dissertation, two empirical methods are used to assess if abnormal effects arise on South African financial market variables. Firstly, a “surprise” regression method with results suggesting changes to non-borrowed reserves at the Federal Reserve have a statistically significant impact on three of four selected South Africa financial market variables. The second method entails an event study. The event study provides evidence of abnormality displayed across the returns of the four selected South African financial market variables before, during, and after announcements pertaining to quantitative easing and normalisation of interest rates. The event study confirms the findings of the prior established in the “surprise” regression, concluding that abnormal impacts arising from the Federal Reserve’s policy actions are prevalent, and can result in investors earning abnormal returns.
M.Com. (Financial Economics)