IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

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

as
in new window

Length: 26 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:pre:wpaper:201209
Contact details of provider: Postal:
PRETORIA, 0002

Phone: (+2712) 420 2413
Fax: (+2712) 362-5207
Web page: http://www.up.ac.za/economics

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
  2. Geert Bekaert & Robert J. Hodrick, 1991. "Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," NBER Working Papers 3790, National Bureau of Economic Research, Inc.
  3. Bruce E. Hansen, 1998. "Testing for Structural Change in Conditional Models," Boston College Working Papers in Economics 310., Boston College Department of Economics.
  4. Rossi, Barbara, 2002. "Optimal Tests for Nested Model Selection with Underlying Parameter Instability," Working Papers 02-05, Duke University, Department of Economics.
  5. 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.
  6. Pástor, Luboš & Stambaugh, Robert F., 2007. "Predictive Systems: Living with Imperfect Predictors," CEPR Discussion Papers 6076, C.E.P.R. Discussion Papers.
  7. John H. Cochrane, 2008. "The Dog That Did Not Bark: A Defense of Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1533-1575, July.
  8. Allan Timmermann & M. Hashem Pesaran, 2002. "Market Timing and Return Prediction under Model Instability," FMG Discussion Papers dp412, Financial Markets Group.
  9. John Y. Campbell, 1985. "Stock Returns and the Term Structure," NBER Working Papers 1626, National Bureau of Economic Research, Inc.
  10. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  11. James H. Stock & Mark W. Watson, 1994. "Evidence on Structural Instability in Macroeconomic Time Series Relations," NBER Technical Working Papers 0164, National Bureau of Economic Research, Inc.
  12. Vuolteenaho, Tuomo & Campbell, John, 2004. "Inflation Illusion and Stock Prices," Scholarly Articles 3196090, Harvard University Department of Economics.
  13. Amit Goyal & Ivo Welch, 2003. "Predicting the Equity Premium with Dividend Ratios," Management Science, INFORMS, vol. 49(5), pages 639-654, May.
  14. Paul Weller & Christopher Neely, 1999. "Predictability in International Asset Returns: A Re-examination," Working Papers wp99-03, Warwick Business School, Finance Group.
  15. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  16. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  17. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  18. Malcolm Baker & Jeffrey Wurgler, 1999. "The Equity Share in New Issues and Aggregate Stock Returns," Yale School of Management Working Papers ysm124, Yale School of Management, revised 01 Jan 2009.
  19. David E. Rapach & Mark E. Wohar, 2006. "Structural Breaks and Predictive Regression Models of Aggregate U.S. Stock Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(2), pages 238-274.
  20. repec:ecu:wpaper:2009-08 is not listed on IDEAS
  21. Donald B. Keim & Robert F. Stambaugh, . "Predicting Returns in the Stock and Bond Markets," Rodney L. White Center for Financial Research Working Papers 15-85, Wharton School Rodney L. White Center for Financial Research.
  22. Rapach, David E. & Wohar, Mark E. & Rangvid, Jesper, 2005. "Macro variables and international stock return predictability," International Journal of Forecasting, Elsevier, vol. 21(1), pages 137-166.
  23. Kellard, Neil M. & Nankervis, John C. & Papadimitriou, Fotios I., 2010. "Predicting the equity premium with dividend ratios: Reconciling the evidence," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 539-551, September.
  24. David E. Rapach & Jack K. Strauss & Guofu Zhou, 2010. "Out-of-Sample Equity Premium Prediction: Combination Forecasts and Links to the Real Economy," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 821-862, February.
  25. 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.
  26. Breen, William & Glosten, Lawrence R & Jagannathan, Ravi, 1989. " Economic Significance of Predictable Variations in Stock Index Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1177-89, December.
  27. Jacob Boudoukh & Roni Michaely & Matthew Richardson & Michael Roberts, 2004. "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing," NBER Working Papers 10651, National Bureau of Economic Research, Inc.
  28. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  29. Christopher J. Neely & David E. Rapach & Jun Tu & Guofu Zhou, 2011. "Forecasting the Equity Risk Premium: The Role of Technical Indicators," Working Papers CoFie-02-2011, Sim Kee Boon Institute for Financial Economics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pre:wpaper:201209. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rangan Gupta)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.