Abstract:
The equity premium represents the additional rate of return, in excess of the riskfree
rate, required by investors for holding equity. The equity premium is one of the
most important numbers in modern day finance and economics. Despite its
importance, it has been challenging to predict. The purpose of the present study
was to assess the predictability of the equity premium in South Africa. The literature
review identified numerous factors that impact the equity premium. The relationship
between various financial and macroeconomic indicators and the equity premium
was assessed. Individually, eight of the fourteen variables tested demonstrated a
statistically significant association with the equity premium. Regression models that
condition on a large number of independent variables were assessed in terms of
their in-sample significance and relative out-of-sample performance. The results
found that equity premium is predictable when utilising penalised regressions. The
introduction of statistical constraints improved model performance. The significance
of the variance explained by the models indicated that they have the potential to be
beneficial to stakeholders
