Another look at the cross-section of average returns on the JSE

Abstract

ABSTRACTThis study takes another look at the cross-section of average returns on the JSE. The study provides convincing evidence of the presence of the size and value premia on the JSE. In addition, it is established that size and value survive adjustment for trading costs which have a profound impact on the magnitude and persistence of the effects, especially the size premium. It is further shown that restrictions on price have a much stronger impact than the restriction on liquidity. It is found that the book-to-market effect has the strongest power to predict returns and that the earnings-to-price effect is the weakest. It is also shown that all the estimates of the value premia are lower than leading prior SA research has shown. This may indicate that illiquidity and the absence of testing for trading costs may be a partial source of the excessively high value premium documented in previous studies. In addition, the value effect and the size effect have been found to be independent of each other. Lastly, this study corroborates the evidence that the best measure of the value premium is the book-to-market ratio.