The Economics and Finance Letters

Published by: Conscientia Beam
Online ISSN: 2312-430X
Print ISSN: 2312-6310
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No. 1

Optimal Stock Portfolio Issuers of Building Construction Registered in LQ45 Based on the Markowitz Approach

Pages: 100-109
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Optimal Stock Portfolio Issuers of Building Construction Registered in LQ45 Based on the Markowitz Approach

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DOI: 10.18488/journal.29.2019.61.100.109

Rizky Haryana , Bambang Mulyana

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Rizky Haryana , Bambang Mulyana (2019). Optimal Stock Portfolio Issuers of Building Construction Registered in LQ45 Based on the Markowitz Approach. The Economics and Finance Letters, 6(1): 100-109. DOI: 10.18488/journal.29.2019.61.100.109
Increased construction industry and accelerated infrastructure programs drive economic development globally and open opportunities for investors in the capital market. Rational investors will choose investments that provide maximum returns with certain risks, or otherwise certain returns with minimal risk, depending on individual investors' preferences. To minimize risk, one of the methods used is to form a portfolio. The purpose of this study was to find out how to assess the optimal portfolio of shares for building construction companies using the Markowitz approach. The data in this study are secondary based on daily stock prices obtained from the IDX during the period February 2018 to July 2018. The research method used is descriptive, quantitative research. The number of samples used is four issuers, with saturated sampling techniques. The analytical tool used to assess the optimal portfolio is the Markowitz model, and its data is processed using Microsoft Excel. The results showed that an efficient two-share portfolio was found in the combination of ADHI and WIKA issuers, an efficient three-share portfolio was found in a combination of ADHI, WIKA and WSKT issuers, and four-share portfolio alternatives for optimal portfolios were formed by a combination of ADHI issuers, PTPP, WIKA, and WSKT, which together produce the lowest risk level.
Contribution/ Originality
The study is one of very few that have investigated optimal portfolio formation from one sector, namely building construction, and registered in the LQ45 Index with the Markowitz approach.

Regime Changes in the Volatility of Stock Markets

Pages: 92-99
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Regime Changes in the Volatility of Stock Markets

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DOI: 10.18488/journal.29.2019.61.92.99

Houda Litimi

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Houda Litimi (2019). Regime Changes in the Volatility of Stock Markets. The Economics and Finance Letters, 6(1): 92-99. DOI: 10.18488/journal.29.2019.61.92.99
Modeling and forecasting the volatility of financial markets has been the subject of considerable research over the last few decades. It is a key indicator on which financial decisions are based, knowing that the behavior of financial market operators is changing. In this regard, the most popular model in the description of the volatility of financial asset returns is certainly that of the heteroskedastic type. Some authors explain that the behavior of conditional variance can come from structural changes that are not considered by standard GARCH models; hence, the motivation of this paper is to investigate the GARCH model with regime changes. Applications on several world stock indexes, namely, the American S&P 500, the Japanese Nikkei 225, and the French CAC 40 show that the model with regime changes explains the dynamics of risk more efficiently than the classical single-regime models. Furthermore, the conditional distributions of the returns are better modeled with the flexible student’s t test.
Contribution/ Originality
This study uses a new estimation methodology by using a GARCH model with regime changes to explain the dynamics of conditional volatility.

Profitability Behavior of Plastic Industries in Indonesia

Pages: 78-91
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Profitability Behavior of Plastic Industries in Indonesia

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DOI: 10.18488/journal.29.2019.61.78.91

Erwin Mangaratua Pardosi , Bambang Mulyana

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Erwin Mangaratua Pardosi , Bambang Mulyana (2019). Profitability Behavior of Plastic Industries in Indonesia. The Economics and Finance Letters, 6(1): 78-91. DOI: 10.18488/journal.29.2019.61.78.91
This study aims to analyze the effects on the profitability (net profit margin, return on assets and return on equity) of plastic companies by internal influences (current ratio, debt to equity ratio and total asset turnover) and external influences (exchange rate, petroleum price and inflation). The object of the research is the plastic industries registered in the Indonesian stock exchange with a total of 9 industries and in the period 2012 - 2017. The methodology used is descriptive quantitative research and causality with purposive sampling technique and panel data regression analysis. The results of this study indicate that the current ratio has a partially positive effect, particularly significant in terms of net profit margin. Current ratio and total asset turnover also have a partially positive effect, with significant return on assets. Debt to equity ratio partially has a partially negative effect, but a significant return on equity.
Contribution/ Originality
This study is one of very few that has investigated the causal relationship between internal and external influences on profitability. Consequently, it highlights the importance of identifying financial ratios and macroeconomics with a view to increasing profitability.

Impact of Network Finance Development on Inflation: Evidence from Chinese Market

Pages: 67-77
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Impact of Network Finance Development on Inflation: Evidence from Chinese Market

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DOI: 10.18488/journal.29.2019.61.67.77

Feng Junwen , Wang Gang , Wu Yuchen

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Feng Junwen , Wang Gang , Wu Yuchen (2019). Impact of Network Finance Development on Inflation: Evidence from Chinese Market. The Economics and Finance Letters, 6(1): 67-77. DOI: 10.18488/journal.29.2019.61.67.77
With the rapid development of computer, communications, Internet and database technology, the society entered the era of the Internet economy. At present, as the impacts on the development of network finance, the three elements of technology, economic and social are in rapid change and development, at the same time, the financial network has also been considerable development, a variety of online banking, so-and-so Bao everywhere, P2P net loan platform as sprung up in public view. The flourishing financial network has attracted a lot of money from reality to the network platform, the currency in circulation had seen a considerable impact, as a monetary phenomenon whether this change will have an impact on inflation, this article is to discuss the problem. This article from the perspective of a qualitative and quantitative study of the network of financial development of inflation, respectively, will eventually make some recommendations lying on the conclusions of this paper to the monetary policy under the influence of the inflationary effects.
Contribution/ Originality
This study uses new estimation methodology to analyze and study the quantitative and qualitative factors affecting the inflation of financial network, and finds out the operating mechanism inside. Finally, according to the research content, the study puts forward some suggestions on monetary policy under the influence of inflation.

Impact of Asymmetric Government Spending on Real Balances Demand

Pages: 57-66
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Impact of Asymmetric Government Spending on Real Balances Demand

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DOI: 10.18488/journal.29.2019.61.57.66

Tersoo Shimonkabir SHITILE , Gylych JELILOV

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Tersoo Shimonkabir SHITILE , Gylych JELILOV (2019). Impact of Asymmetric Government Spending on Real Balances Demand. The Economics and Finance Letters, 6(1): 57-66. DOI: 10.18488/journal.29.2019.61.57.66
This paper uses time series technique on Nigeria’s data spanning over 20 years, 1995Q1 to 2018Q1 in order to examine the impact of asymmetric government spending on money demand. Taking into account the recent empirics and methodological approach in money demand function such as income decomposition in public and private sectors, an augmented empirical model of real balances demand was applied which underscores the positive and negative changes in government. The empirical results show a positive value of real government spending accounting for 30 per cent changes in long-term demand for real balances. However, the negative value of real government spending influence accounts for 20 per cent real balances demand in the long-term. This inquiry, thus contributes to the literature on the demand for real balances by focusing on the cyclical behavior of fiscal policy in Nigeria that has not so far been systematically tested. The findings on real government spending effect also suggest that bureau de change exchange rate and financial innovation have a negative and significant impact on money demand, which is consistent with findings of existing literature. The degree and direction of asymmetry provide a novel dimension to fiscal policy shock toward improving the outcome of stabilization policies.
Contribution/ Originality
This study is one of very few investigations to consider the influence of the cyclical behaviour of government expenditure on demand for real balances using the ARDL model in Nigeria from 1995 to 2018.

Determinants of Banks Profitability & Liquidity and the Role of BASEL III in Islamic & Conventional Banking Sector of Pakistan: A Case Study of NBP

Pages: 40-56
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Determinants of Banks Profitability & Liquidity and the Role of BASEL III in Islamic & Conventional Banking Sector of Pakistan: A Case Study of NBP

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DOI: 10.18488/journal.29.2019.61.40.56

Sitara Bibi , Fatima Mazhar

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Sitara Bibi , Fatima Mazhar (2019). Determinants of Banks Profitability & Liquidity and the Role of BASEL III in Islamic & Conventional Banking Sector of Pakistan: A Case Study of NBP. The Economics and Finance Letters, 6(1): 40-56. DOI: 10.18488/journal.29.2019.61.40.56
This study aimed to examine and compare the performance of Islamic and Conventional banking sector of Pakistan in terms of the impact of BASEL III reforms on the profitability and liquidity of Islamic and conventional banks of Pakistan. For this purpose, National bank of Pakistan has been taken as a unit of analysis and eight year’s financial data has been collected from the official website of NBP. BASEL III standard’s ratios including CAR, CER and LCR have been used as an independent variable while the bank’s profitability and liquidity have been taken as a dependent variable. Descriptive statistics have been performed first to examine and compare the performance of both Islamic and conventional banking sector before and after the induction of BASEL III. After that T-Test has been performed to investigate the differences between the impact of BASEL III on the profitability and liquidity of Islamic and conventional banking sector. The regression analysis has been performed to examine whether BASEL III has a strong relationship with Islamic or conventional banking sector. The results found that BASEL III has a significant positive relationship with the profitability and liquidity of the Islamic sector. Islamic banks are higher in terms of the impact of BASEL III on profitability and liquidity. They are more profitable, more liquid and highly capitalized with BASEL III standards. While Conventional banking sector needs to redesign their policies and make them more compliant with BASEL III to generate more profit and be more liquid as Islamic banks are.
Contribution/ Originality
This study is one of the very few studies which have investigated the impact of BASEL III on the profitability and liquidity of Islamic and Conventional banking sector through comparative analysis. The results reveal that Islamic banks are more profitable, more liquid, more compliant and highly capitalized with BASEL III standards.

Factors that Influence Profitability of General Insurance Issuers in Indonesia

Pages: 25-39
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Factors that Influence Profitability of General Insurance Issuers in Indonesia

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DOI: 10.18488/journal.29.2019.61.25.39

Ermy Elisabeth , Bambang Mulyana

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Ermy Elisabeth , Bambang Mulyana (2019). Factors that Influence Profitability of General Insurance Issuers in Indonesia. The Economics and Finance Letters, 6(1): 25-39. DOI: 10.18488/journal.29.2019.61.25.39
This research aims to examine and to analyze factors that influence profitability of general insurance issuers in Indonesia. Factors that are examined consist of activity (working capital turnover), liquidity (current ratio), solvency (risk based capital) and profitability (net profit margin, return on investment and return on equity). Research data is quarterly data for five year period (March 2012 to December 2016). The purposive sampling method was used from a population comprising 14 general insurance issuers with outcome of 5 issuers that met the criteria. Using the multiple linear regression method of analysis for panel data, the results revealed that the variables of the working capital turnover, current ratio and risk based capital simultaneously influenced profitability (net profit margin, return on investment, return on equity) while working capital turn over influenced profitability (net profit margin, return on investment and return on equity) only partially. Current ratio also influenced profitability ratio (net profit margin and return on equity) however, Risk Based Capital did not influence all profitability ratios. The results of the study indicate that Insurance companies should increase their sales in order to get a higher working capital, maintain a liquidity ratio and achieve solvency ratio according to the regulations.
Contribution/ Originality
This study is one of the first empirical studies to analyze factors that influence profitability of general insurance issuers in Indonesia. The findings of the study reveal such factors and their significance for the insurance companies to earn profitability.

Foreign Direct Investment in Zimbabwe: The Role of Uncertainty, Exports, Cost of Capital, Corruption and Market Size

Pages: 9-24
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Foreign Direct Investment in Zimbabwe: The Role of Uncertainty, Exports, Cost of Capital, Corruption and Market Size

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DOI: 10.18488/journal.29.2019.61.9.24

J. Muzurura

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J. Muzurura (2019). Foreign Direct Investment in Zimbabwe: The Role of Uncertainty, Exports, Cost of Capital, Corruption and Market Size. The Economics and Finance Letters, 6(1): 9-24. DOI: 10.18488/journal.29.2019.61.9.24
Most of developing countries such as Zimbabwe see foreign direct investment as a panacea for augmenting domestic savings, generating employment, eradicating poverty and stimulating economic growth. Foreign direct investment also is associated with significant positive spillover benefits such as; facilitating technological progress, enhancing production efficiencies, promoting skills and knowledge diffusion and increasing international competitiveness. The paper investigated the role of cost of capital, uncertainty, exports, market size and other macro factors in attracting FDI in Zimbabwe. This paper relied on a time series analysis using Ordinary Least Regression equation for the period 1998-2017. Uncertainty and cost of capital were found to be negative and statistically significant whilst market size and lagged exports were found to be positive and statistically significant. The paper recommends adoption of policies that improve domestic absorptive capacity such as the elimination of uncertainties in the economy, promoting more trade openness, improving market size and liberalisation of credit and financial markets to reduce firm borrowing costs.
Contribution/ Originality
This study contributes to the existing literature on foreign direct investment by demonstrating the role of macro-uncertainty and cost of capital in attracting FDI. In addition, this study utilizes a new estimation methodology of FDI that is based on the modification of the flexible accelerator model of investment behaviour.

Exchange Rate and Foreign Reserves Interface: Empirical Evidence from Nigeria

Pages: 1-8
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Exchange Rate and Foreign Reserves Interface: Empirical Evidence from Nigeria

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DOI: 10.18488/journal.29.2019.61.1.8

Ebere Ume Kalu , Ogochukwu E. Ugwu , Victor Chijioke Ndubuaku , Ozioma Patricia Ifeanyi

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Ebere Ume Kalu , Ogochukwu E. Ugwu , Victor Chijioke Ndubuaku , Ozioma Patricia Ifeanyi (2019). Exchange Rate and Foreign Reserves Interface: Empirical Evidence from Nigeria. The Economics and Finance Letters, 6(1): 1-8. DOI: 10.18488/journal.29.2019.61.1.8
This work was set out to measure the responsiveness of foreign reserves to exchange rate variables with a focus on the Nigerian economy. Foreign reserve was used as a dependent variable and all the exchange rate related variables used as independent variables. Time series data spanning 1996 to 2016 was used. A combined use of the Auto Regressive Distributed Lag Model (ARDL) and correlation matrix were employed. It was found that a positively significant relationship exists between real exchange rate and reserves with nominal exchange rate sharing a positive but non-significant relationship with foreign reserves. This makes a case for proper policy direction in the management of exchange rate in a manner that produces the best economic results for the Nigerian economy. The results are considered useful for economies in the shape of Nigeria for generalization and policy direction in the management of foreign reserve and its interface with exchange rate and its related factors.
Contribution/ Originality
This study contributes to the existing literature by uncoupling exchange rate into nominal and real in measuring the nexus with foreign reserves. This study uses new estimation methodology which is the ARDL approach unlike prior studies that used OLS predominantly. The paper contributes the first logical analysis by carrying out pre-test, estimation proper and diagnostic analyses. The paper's primary contribution is that it exposes the fact that a nexus exists between foreign reserves and changes in exchange rate.