African Stock Market Research Articles

Periodically collapsing bubbles in the South African stock market

This paper studies the existence and timing of bubbles in South Africa’s stock market. An empirical model of bubble formation is tested against three competing models of asset price returns that rule out the existence of bubbles. The model controls for nonlinearities inherent in asset price returns by allowing for the existence of multiple regimes. The bubble model fits the data better than the competing models and suggests that the formation and existence of periodically collapsing bubbles are a reality.

Structural breaks in the relative importance of country and industry factors in African stock returns

Abstract Risk sharing opportunities and international diversification benefits crucially depend on the relative importance of global and national factors. By decomposing the variance of African stock market index returns into global and country specific components, we show that national effects dominate. However, global effects have recently become more important and we identify that significant structural breaks occurred during the Global financial crisis (GFC). Also, the impact of the GFC on African markets was largely through the real sector.

Multi-Factor Asset Pricing Model in the South African Stock Market

This study examines the performance of the CAPM, the three-factor model, the four-factor model and their liquidity adjusted variants in explaining realised returns, and also investigates the importance of higher moments in the South African stock market using the Basic Materials Index. The liquidity adjusted four-factor model performs best in explaining realised returns; however book-to-market value factor was found to be insignificant. Beta was consistently significant for all the models along with size, momentum and liquidity, however, unlike popular findings in the developed markets, large stocks were found to outperform small stocks and liquid stocks were found to outperform illiquid stocks. Including a dummy for the financial crisis changed some of the results significantly indicating the importance of model stability and the need to account for structural breaks/time variation. The two higher moment factors were also found to be important in pricing South African stocks. However, when the higher-order moments are included in the liquidity augmented four-factor model, the alpha term becomes significant.

Topology of the South African stock market network across the 2008 financial crisis

This study uses the cross-correlations in the daily closing prices of the South African Top 100 companies listed on the JSE All share index (ALSI) from June 2003 to June 2013 to compute minimum spanning tree maps. In addition to the full sample, the analysis also uses three sub-periods to investigate the topological evolution before, during, and after the 2008 financial crisis. The findings show that although there is substantial clustering and homogeneity on the JSE, the most connected nodes are in the financial and resources sectors. The sub-sample results further reveal that the JSE network tree shrank in the run-up to, and during the financial crisis, and slowly expanded afterwards. In addition, the different clusters in the network are connected by various nodes that are significantly affected by diversification and credit market dynamics.

Robustness of the Carhart four-factor and the Fama-French three-factor models on the South African stock market

Purpose – The purpose of this study is to explore the applicability of the Fama–French and Carhart models on the South African stock market (SASM). It examines the ability of the models to capture size, book-to-market (BM) and momentum effects on the SASM. The paper, additionally, explores the ability of the Fama–French–Carhart factors to predict the future growth of the South African economy. Design/methodology/approach – The paper relies on data of 848 firms from January 1996 to April 2012 to examine the size, BM and momentum effects on the SASM. The paper constructs the test assets from a 3 × 3 sort on size and BM and a 3 × 3 sort on size and momentum. The paper estimates momentum as the past six-months’ cumulative return. The momentum portfolios are monthly rebalanced. Additionally, the size and BM portfolios are formed annually at the end of each June. Findings – Evidence is provided that size, BM and momentum effects exist on the SASM; also, the small- and high-BM firm portfolios, respectively, appear riskier than the big- and low-BM firm portfolios. The paper provides evidence of past winners outperforming past losers aside from the small-firm group. Additionally, the models only partially capture the size and value effects on the SASM. The Carhart model partly captures the momentum effects, but the Fama–French model is unable to describe the returns to the momentum-sorted portfolios. The evidence shows that the models’ factors predict future gross domestic product growth. Originality/value – The models do not fully describe returns on the SASM; any application of the models on the SASM should be done with caution. The Carhart model better describes returns than the Fama–French model on the SASM. The Fama–French–Carhart factors may relate to the underlying economic risk of the South African economy.

Dynamic Selection of Optimal Sub-portfolio - Application in the Regional Stock Exchange of Securities in West Africa (BRVM)

In this paper, we consider a generalization of the mean-variance model of Markowitz, including a new limiting constraint on marginal returns through the PER(price earnings ratio), that we apply to an optimal portfolio selection in the Regional Stock Exchange of Securities in West africa (BRVM). We study the PER restriction impact through a dynamic selection of optimal sub-portfolios from an initial portfolio. We trace out dynamically the efficient frontiers of the sub-portfolios for different integer values of the PER. The main objective is to provide, for every level of performance (in term of returns) and for a fixed PER, the selection of optimal sub-portfolios that should lead, for a minimal risk, to the same performance as the original portfolio. We show that based on the PER, we can know for each level of performance, the securities to turn down to be able to define the best selection that converge to the optimal portfolio. Moreover, this work is a contribution to the development efforts of our financial systems and our West African stock market environment. The plots of the efficient frontiers of the sub-portfolios were carried out throughout data collected from the BRVM (Regional Stock Exchange Securities) in the period from October 2014 to February 2015.

Risk Factors in Returns of the South African Stock Market

This paper employs a multifactor model motivated by the Arbitrage Pricing Theory (APT) to describe the time series behaviour of the South African stock market as represented by the JSE All-Share Index. Factors representative of eight risk factor categories are considered, namely inflation, real activity, the money supply, interest rates, commodities, exchange rates, business cycles indicators and international market indices. These categories are then represented in the return generating process. The results indicate that the South African stock market is influenced by movements in international markets, inflation, inflation expectations, real activity, the money supply, oil prices, exchange rates and cyclical variations in the business cycle. Furthermore, the Autoregressive Conditional Heteroscedastic (ARCH) and Generalized Autoregressive Conditional Heteroscedastic (GARCH) model framework is found to be a more appropriate econometric framework relative to the Least Squares framework (LS) for models of the return generating process of South African stock returns.

An econometric model of the South African stock market

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.

Stagflation and the South African Equity Market

Abstract By empirically examining South African equity prices between 1969 and 2013, this study attempts to determine whether or not stagflationary conditions warrant a change in perspective by South African investors. This study considers whether macro conditions really are compromised and explores whether the behaviour of market returns and equity valuations change during periods of stagflation. It is found that the relationship between economic growth and inflation changes during periods of stagflation and that earnings yield models and equity returns models exhibit different behaviour between periods of stagflation and no-stagflation. This study therefore confirms that the South African stock market needs to be approached differently during periods of stagflation.

Market Efficiency in Developing African Stock Markets: What Do We Know?

In the late 1980s, many countries in Africa established national stock exchanges with a view to foster financial development and economic growth. This paper provides a survey and synthesis of the extant literature on the efficiency of African equity markets (AEMs). It explores the path of development of stock markets in Africa with an emphasis on their efficiency, trends in performance, and developmental challenges. We find that much of the research into the efficiency of AEMs has focused on weak-form efficiency and the results, though mixed, lean towards rejection of the weak-form efficiency. We also find that the empirical literature has ignored the role of behavioral biases in the analyses of market efficiency, and has treated efficiency as static over different stages of market development. Finally, considering the traditionally small size of most AEMs, increased harmonization and integration of the various national exchanges may improve the informational efficiency and depth of AEMs.

Market Integration, Return and Volatility Dynamics: Empirical Evidence from African Stock Markets

This study examines the extent of integration of liberalized African equity markets with the US, the world, the BRIC countries, and other emerging markets. Specifically, we examine the relationship between seven African markets, namely those of Kenya, South Africa, Mauritius, Tunisia, Egypt, Zambia, and Morocco with the World market index and the US market index. In addition, the relationship between the African markets and the BRIC countries, and the Emerging Market Index is analyzed. We investigate, whether there are pure contagion effects in the markets under consideration during the (US) financial crisis of 2008. A bivariate VAR–GARCH–BEKK model is used in the analysis. Our empirical findings support the notion that these markets are still green for investment and provide portfolio benefits. Diversification benefits with African stock markets are dwindling over the years, but these benefits do not disappear entirely. Furthermore, the increased correlations between the African and the developed markets are still small, in comparison with correlations found between developed markets

African stock market returns and liquidity premia

We investigate the association between African real stock returns and stock liquidity for sixteen countries over the years 1995–2010. Using fixed effect models (FEM) and system generalized method of moments (SGMM), stock returns and liquidity measures are positively related when South Africa is excluded from the sample, making liquidity “priced in” these less liquid markets. The discount rate (MSCI world index return) is negatively (positively) related with African stock returns. Overall, the results on controls are more robust in dynamic panels: equity markets respond negatively to local currency appreciation, consistent with the export-commodity nature of many of these countries.

Returns On Large Stock Price Declines And Increases In The South African Stock Market: A Note On Market Efficiency

This study tests for underreaction and overreaction in the South African stock market by examining abnormal returns on the stocks included in the FTSE Group Johannesburg Stock Exchange Top 40 index following large price rises and drops. The results of our empirical investigation suggest that large price increases and declines are likely to be followed by positive market returns. In addition, for the post-2008 time period the risk of these stocks increases significantly for up to two years following the original event. Therefore, the results lend further support to the Uncertain Information Hypothesis.

Integration of the African Stock Markets to the Global Markets: Case Study of South Africa

The paper empirically investigates the extent to which the South African stock market is integrated to other African stock market as well as the developed markets as represented by the US, Japan and German. The study employs the Autoregressive Distributed Lag (ARDL) approach to cointegration because it is a more reliable method than other conventional cointegration approaches and is also applicable even if the series are integrated of different orders, as long as none is of order 2 or more. It is also more robust and performs well for small sample sizes unlike the conventional approaches which are valid for large sample sizes. The results of empirical tests suggest that the South African stock market is fully integrated to the developed markets. However, the South African stock market is not fully integrated to other African stock markets. This suggests that investors can diversify their portfolios by investing in other African stock markets. DOI: 10.5901/mjss.2014.v5n2p619

Synchronicity in international stock markets: evidence from USA-South Africa

The South African equity market witnessed very strong lift since 1994 and is included in BRICS countries in 2010. The emergence of the sub-prime crisis in the USA had an adverse impact on the global markets especially emerging market like South Africa. The primary objective of the present study is to analyse the distinctiveness of price movements and volatility spill over effects between the USA (NYSE) and the emerging economy of South Africa employing daily time series data spanning Jun 2006 to May 2012. The stock price synchronicity is examined using VECM-based causal relationship during the 2006-2012 (entire sample period) and 2007-2009 (financial crisis period). Further, the speed of transmission of shocks from the USA to SA in the long run, short run deviations and swiftness of recovery during the US subprime mortgage crisis is also analysed. The results reveal that both long-run and short-run dynamic nexus exist between these stock markets. In addition, the nexus is amplified in the short-run during the US financial crisis. This suggests that changes in the US stock markets swiftly affect the South African stock market and the US index acts as a conducing indicator for information transmission across the two markets.

Effects of Exchange Rate Volatility on the Stock Market: A Case Study of South Africa

This study assessed the effects of currency volatility on the Johannesburg Stock Exchange. An evaluation of literature on exchange rate volatility and stock markets was conducted resulting into specification of an empirical model. The Generalised Autoregressive Conditional Heteroskedascity (1.1) (GARCH) model was used in establishing the relationship between exchange rate volatility and stock market performance. The study employed monthly South African data for the period 2000 – 2010. The data frequency selected ensured an adequate number of observations. A very weak relationship between currency volatility and the stock market was confirmed. The research finding is supported by previous studies. Prime overdraft rate and total mining production were found to have a negative impact on Market capitalisation. Surprisingly, US interest rates were found to have a positive impact on Market capitalisation. The study recommended that, since the South African stock market is not really exposed to the negative effects of currency volatility, government can use exchange rate as a policy tool to attract foreign portfolio investment. The weak relationship between currency volatility and the stock market suggests that the JSE can be marketed as a safe market for foreign investors. However, investors, bankers and portfolio managers still need to be vigilant in regard to the spillovers from the foreign exchange rate into the stock market. Although there is a weak relationship between rand volatility and the stock market in South Africa, this does not necessarily mean that investors and portfolio managers need not monitor the developments between these two variables. DOI: 10.5901/mjss.2013.v4n14p561

Does the source of oil price shocks matter for South African stock returns? A structural VAR approach

In this paper, we investigate the dynamic relationship between different oil price shocks and the South African stock market using a sign restriction structural VAR approach for the period 1973:01 to 2011:07. The results show that for an oil-importing country like South Africa, stock returns only increase with oil prices when global economic activity improves. In response to oil supply shocks and speculative demand shocks, stock returns and the real price of oil move in opposite directions. The analysis of the variance decomposition shows that the oil supply shock contributes more to the variability in real stock prices. The main conclusion is that different oil price shocks affect stock returns differently and policy makers and investors should always consider the source of the shock before implementing a policy and making investment decisions.

Changing Patterns In The Day-Of-The-Week Effects In African Stock Markets

The changing patterns in returns on African stock markets have not been adequately documented. This paper addresses this gap by testing for the day-of-the-week effect and the changes in the patterns of returns for several African stock markets. A direct test on skewness and kurtosis is used to capture higher statistical moments in the search for seasonal patterns in returns. Daily index data for South Africa, Zambia, Botswana, Nigeria, and Morocco are used for the period 2004 to 2012. Day-of-the-week effects are documented for all the countries with the exception of South Africa. Furthermore, significant changes in patterns over time are observed for these same countries. Each day in the pre-financial crisis period shows significantly different patterns to every other day in post-crisis epoch. Further, the patterns displayed amongst the countries with significant results are largely similar in terms of highest/lowest mean returns. This paper presents new policy implications and research suggestions on the day-of-the-week patterns.

Global Integration of African Stock Markets

Financial market integration has significant implications for risk sharing and diversification, cost of capital, market efficiency, financial decisions and macro-economic policy. This paper investigates the integration of 11 African markets relative to the world and emerging markets over the period, March 1997 to January, 2013. The investigation is conducted using a multifactor asset pricing model. The paper explores whether a world or emerging market factor commands a premium over a pure African factor. It relies on the returns to a world, emerging and African market indices as risk factors. The factors used in this study are orthogonal to each other. The factors and their associated risk premia are concurrently estimated. Evidence is provided that the world, emerging and African market factors command significant risk premium on the African markets. The findings support partially integrated African market. The evidence shows that both world and emerging market factors are pertinent on the African markets. The evidence is generally sensitive to the period of investigation suggesting changing integration through time.

The Response of the Johannesburg Stock Exchange to Changes in Exchange Rate Regimes

This paper used Granger Causality test and descriptive statistics analysis to examine the response of the South African stock market to different exchange rate regimes from 1978 to 2008. The analysis of the history of the exchange rate regimes in South Africa showed that the flexibility was introduced in 1979 but the exchange rate shocks of great magnitude appeared during the period of the free-floating exchange rate system (1995-2008). Results reported in this paper revealed that the response of Johannesburg Stock Exchange to changes in the exchange rate was not consistent throughout different exchange rate regimes. A significant correlation between the variables during the sub-periods characterised by capital controls was observed. Granger causality test revealed that the direction of causality changed with exchange rate regimes. This paper concluded that changes in exchange rate regimes have a significant impact on the relationship between the stock market index and the exchange rate. DOI: 10.5901/mjss.2013.v4n6p413