Abstract
A wealth of literature exists concerning the modelling of stock markets, as well as the examination of the relationshiop between share price and various economic factors, both theoretically and empirically. However, most studies use data for developed countries in their analyses, while the literature moselling emerging stock markets in general, and the south African stock market in particular, is quite sparse. This study develops a structural theoretically founded model of the South African stock market that is estimated using co-integration and error-correction techniques. These techniques respectively estimate the long-term equilibrium or intrinsic value of the stock market, and the short-term fluctuations around the quilibrium level. According to the results, share prices are co-integrated with the variables dictated by the expected present value model of asset price determination. The short-term fluctuations are determined by various factors such as interest rates, a risk premium, the exchange rate, foreign stock market adn other variables.
Highlights
A wealth of literature exists concerning the modelling of stock markets as well as the examination of the relationship between share prices and various economic factors, both theoretically and empirically
Van Rensburg studied the bivariate relationships between the Johannesburg Stock Exchange (JSE) and economic variables, while Barr and Kantor developed an econometric model of the South African economy, focusing on the linkages between the real and financial markets and between domestic and foreign financial markets
Since South Africas abolition of exchange controls on foreigners in 1995, foreign investors have been net buyers in excess of R9.3 billion, compared to only R0.185 billion in 1994; (ii) Foreign investors have welcomed the scrapping of the 15 per cent non-resident shareholders tax in October 1995; (iii) Many investors who had previously left South Africa due to their disagreement with the political regime returned with the introduction of the new political dispensation in 1994; and (iv) Owing to the relative volatility of the JSE, foreign investors welcome the development of financial instruments such as futures and options markets in the rand and share indices in South Africa, which enable them to hedge currency and equity risks
Summary
A wealth of literature exists concerning the modelling of stock markets as well as the examination of the relationship between share prices and various economic factors, both theoretically and empirically. If the stock market is found to be driven in the long term by fundamental domestic factors, it means that contagion influences only short-term fluctuations and not the long-term level or intrinsic value of the stock market This issue is very important, as it has crucial implications for the role of stock markets in the broader economic development process. This study makes three contributions to the literature: it empirically evaluates the role of economic fundamentals in the behaviour of share prices in South Africa; it estimates a theoretically founded empirical model of the South African stock market; it establishes the factors that influence the stock market in the long and short term and quantifies these impacts.
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