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A learning-augmented approach to pricing risk in South Africa

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  • Jacques Peeperkorn

    (University of the Witwatersrand)

  • Yudhvir Seetharam

    (University of the Witwatersrand)

Abstract

Through application of state-space modelling, the asset pricing model is re-explored. The result is an asset pricing model which tracks the evolution of investor probability beliefs and learning through a Kalman filter. This behaviourally inspired model shows marked improvement over a traditional asset pricing model, with pricing errors being reduced by as much as 41 % over a 16 year period using South African equities data. We find that investors tend to price long-run risk whilst being notably influenced by exposure to lagged market performance. Together, these findings lend support to the hypothesis that investors tend to price risk as a dynamic learning process in an emerging market.

Suggested Citation

  • Jacques Peeperkorn & Yudhvir Seetharam, 2016. "A learning-augmented approach to pricing risk in South Africa," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 6(1), pages 117-139, April.
    • Handle: RePEc:spr:eurasi:v:6:y:2016:i:1:d:10.1007_s40821-015-0038-9
    DOI: 10.1007/s40821-015-0038-9
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    References listed on IDEAS

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    More about this item

    Keywords

    Kalman filter; Asset pricing; Behavioural finance; Emerging markets;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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