The Effect of Macroeconomic Variables on the Asset Positions and Financial Performance of Non-Banking Financial Institutions (NBFIs) in Jamaica

Abstract

The aim of the paper is to evaluate the effect of macroeconomic variables such as real GDP, unemployment levels, bond yields, stock market growth, and interest rate on the asset positions and financial performance of non-banking financial institutions (NBFIs) in Jamaica. This is reflected by return on asset (ROA) ratio, return on equity (ROE) ratio and total asset growth (TA). To explore the nature of the short and long-term relationship between dependent variables and independent variables, the research used a bound test approach to the co-integration and error correction process using time series data over the period from 2005Q1 to 2020Q3. The results showed that real gross domestic product (RGDP) and unemployment rate (UR) had a positive long-run relationship with ROA; government bond yield (GBY), UR, interest rate (IR) and stock market growth (JSEM) influenced ROE positively at the long-run; while all the independent variables showed a long-run causal relationship with TA. In the short-run estimates, however, minimal short-run causal relationships among variables could be identified with ROA, ROE and TA. Meanwhile, the research has shown there is a stable long-run relationship between the three profitability metrics and the variables that have a significant long-run relationship with them. This assumes that, in the event of some shock to the system, the model will converge back to equilibrium. Furthermore, the cumulative sum of recursive residuals (CUSUM) checks validated the model’s stability.