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.
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