Issouf Soumaré

Causality between FDI and Financial Market Development: Evidence from Emerging Markets

This paper studies the causal relationship between foreign direct investment (FDI) and financial market development (FMD) using panel data from emerging markets. Most studies of the relationship between FDI and FMD have focused on the role of FMD in the link between FDI and economic growth, with no deep understanding of direct causality between FDI and FMD, especially in emerging markets, where financial markets are in the development stage. We document bidirectional causality between FDI and stock market development indicators. For banking sector development indicators, the relationship is ambiguous and inconclusive. Care is therefore needed when analysing the relationship between FMD and FDI, as results may depend on whether the FMD variables used to evaluate causality are stock market or banking sector development indicators.

Applying the CAPM and the Fama–French models to the BRVM stock market

This article applies and compares two asset-pricing models – the Capital Asset Pricing Model (CAPM) and the Fama–French three-factor pricing model – on the stocks of 28 companies listed on the Bourse Régionale des Valeurs Mobilières (BRVM) for the period July 2001–December 2008. We find that 11 stocks satisfy the CAPM, and the market risk factor explains an average of only 11.32% of the excess stock return variations. When we apply the Fama–French model, we find that 10 of the 28 stocks satisfy the models hypotheses and equations: for most of these securities, a CAPM-type model specification is rejected. When we add the size and book-to-market explanatory factors, the average adjusted R 2 increases to 20.40%. Both models, however, failed to explain the variations in returns of at least 60% of the stocks listed on this market.

Risk-Based Capital and Credit Insurance Portfolios

This paper analyzes the risk-management practices of a vulnerable credit insurer by studying the effects of time-varying correlations, asset risks and loan maturities on the risk-based capital that backs credit insurance portfolios. Since asset correlations may change over a business cycle, we have analyzed these effects by means of a one-factor Gaussian stochastic model as part of an extended contingent claims analysis. Our results show the need to account for cyclical changes to correlations in the pricing of credit insurance. When compared with the reserve of risk-based capital recommended by the Basel II Internal Ratings-Based (IRB) approach, our model provides a better capital buffer against extreme credit losses, especially in times of recession and/or in a risky business environment. Using a risk-adjusted performance metric (RAPM), we find insurers perform better when insuring relatively short-term loans. We also make several policy recommendations on creating a reserve of risk-based capital to protect against possible loan losses.

FDI and Financial Market Development in Africa

The literature on the relationship between foreign direct investment (FDI), financial market development (FMD) and economic growth focuses mainly on two aspects: the relationship between FDI and economic growth, and the role played by FMD in that linkage. The literature is almost silent on the relationship and the direction of causality between FDI and FMD. Although it has been established that FDI contributes more to growth in countries with a more developed financial market, it is not clear how FDI and FMD interact with each other. The aim of this paper is to fill this gap in the African context. Particularly, in Africa, where stock markets experience low liquidity and less transparency, FDI can be an impetus for financial market reforms and serve as a mechanism to improve the transparency and the depth of the financial markets. Also, well‐functioning financial markets can help channel foreign investments more efficiently into productive sectors, and therefore create more value for investors, hence making the countries more attractive to FDI. In short, both FDI and FMD will impact each other simultaneously, which is confirmed by our findings. We document a bidirectional causality between FDI and FMD. Furthermore, the multivariate regression results of the system of simultaneous equations also confirm the positive relationship between FDI and FMD in Africa. We also find that FDI contributes to economic growth in Africa after controlling for endogeneity between FDI, FMD and economic growth.

An Analysis of Portfolios of Insured Debts

This article analyzes multi-year risk management decisions in portfolios of insured debts or credit insurance. This is done by investigating risk reduction through portfolio diversification, increased insuring capacity and changes in contracts maturities. We propose a contingent-claims model that includes many realistic features such as coupon payments, stochastic interest rate and stochastic cash flows volatility. We distinguish between two types of portfolios: ‘closed’ and ‘opened’. We find that for a given riskiness level of insurers capital, an optimal value of credit insurance can be obtained by appropriate risk diversification and/or increased insurers capital. Our simulation results show that for insurers with high risk exposure, portfolio risk diversification is more effective than increasing insuring capacity. For a creditworthy insurer, increasing the size of the insurer’s capital can lead to significant improvement in the value of the credit insurance portfolio. This suggests that alternative risk transfer techniques, which provide synthetic (or contingent) capital to the insurer, should be considered in an integrated risk management.

Comparative study of the characteristics of FDI from China to Africa versus developed countries

Abstract Foreign direct investments are expected to contribute to fill the huge infrastructure gap in sub-Saharan Africa, estimated at more than US

Hedging Flood Losses Using Cat Bonds

93 billion annually over the next 10 years according to the African Development Bank. At the last Summit of the Forum on China-Africa Cooperation (FOCAC) held on 3–5 December 2015 in Johannesburg in South Africa, Chinese President Xi Jinping announced several measures to boost cooperation with Africa in the coming years to improve the business environment and support the industrialisation in African countries. Following this continuing Chinese engagement in Africa, this paper makes a comparative study of the characteristics of FDI inflows from China to Africa versus developed countries. The aim is to examine whether FDI to Africa from developed countries are effectively based on good governance, or if they follow the same pattern as the one observed for emerging economies like China. Using a dynamic panel model, we show that natural resources, such as coal and minerals, are key determinants of Chinese FDI in Africa. For OECD countries, good governance and institutional quality in the host country seem to matter. Finally, for both origins, the level of infrastructure development in the host country is important to attract more FDI.

Risk-based capital for credit insurers with business cycles and dynamic leverage

Abstract In this paper, we develop a methodology to model the risk of losses resulting from a natural disaster in which the intensity parameter of the non-homogeneous Poisson process has an upward trend and a seasonal component. We apply this model to losses due to floods in the Financial Assistance Program of the Government of Quebec (Canada). We use the historically observed risk premiums to assess the financial costs for the government if it had issued such instruments to hedge risk linked to floods.

Does FDI improve economic development in North African countries

This paper develops a risk-based capital pricing model for credit insurance portfolios held by a vulnerable insurer. The model accounts for business cycles using a two-state Markov switching model, and allows for dynamic leverage adjustment by the insured firms. The new proposed model, which incorporates risk-based capital practice, is better for both the insurer and the insured firms. Based on the risk-adjusted performance metric, we found that the insurer is better off insuring short- and medium-term loans in expansion and steady states, while it is better off backing both short- and long-term loans in recessions. Our results also emphasize that macroeconomic uncertainty significantly impairs the creditworthiness of the insurer and insured firms.

Hedging Portfolios of Financial Guarantees

This article examines the relationship between FDI inflows and welfare improvement in North African countries. Using net per capita FDI inflows and the United Nations Development Program’s Human Development Index as the principal variables, our analyses confirm the positive and strongly significant relationship between net FDI inflows and welfare improvement in North Africa, although we do find significant differences among the countries in the region. This relationship holds even after we control for government size, country indebtedness, macroeconomic instability, infrastructural development, institutional quality, political risk, openness to trade, education and financial market development. Hence, at the aggregate level, FDI contributes to economic growth in North Africa, in turn generating additional revenues for governments and populations in the region through fiscal policies and jobs creation. We also found that FDI received by countries in the region are mainly concentrated in very few industries (particularly extractive petroleum, services and tourism, construction and utilities); relatively fewer of these investments are directed towards the nonextractive primary industries, which are pro-poor sectors and highly labour intensive, or the manufacturing sector, with a high potential for spillover effects in the economy. This lack of diversification of FDI received in the region’s economies in part explains the differences observed in the link between FDI and welfare in these countries. It is therefore essential for governments in the region to continue investing in social infrastructures while improving the quality of their institutions and their governance; doing so will probably help avoid the type of unrest we have witnessed recently.