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Structural Breaks and Predictive Regressions Models of South African Equity Premium

  • Goodness C. Aye


    (Department of Agricultural Economics, University of Agriculture, Makurdi, Nigeria)

  • Rangan Gupta


    (Department of Economics, University of Pretoria)

  • Mampho P. Modise


    (Department of Economics, University of Pretoria)

In this paper, we test for the structural stability of both bivariate and multivariate predictive regression models for equity premium in South Africa over the period of 1990:01 to 2010:12, based on 23 financial and macroeconomic variables. We employ a wide range of methodologies, namely, the popular Andrews (1993) statistic and the Bai (1997) subsample procedure in conjunction with the Hansen (2000) heteroskedastic fixed-regressor bootstrap. We also used the Elliott and Muller (2003) statistic and Bai and Perron (1998, 2003a, 2004) methodologies. We find strong evidence of at least two structural breaks in 22 of 23 bivariate predictive regression models. We also obtain evidence of structural instability in the multivariate predictive regression models of equity premium. Our results also show that the predictive ability of the 23 variables can vary widely across different regimes.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201209.

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Length: 26 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:pre:wpaper:201209
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  10. Amit Goyal & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," Yale School of Management Working Papers amz2412, Yale School of Management, revised 01 Jan 2006.
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  26. Rangan Gupta & Mampho P. Modise & Josine Uwilingiye, 2011. "Out-of-Sample Equity Premium Predictability in South Africa: Evidence from a Large Number of Predictors," Working Papers 201122, University of Pretoria, Department of Economics.
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