We investigate whether macroeconomic factors adequately proxy for systematic influences in stock returns within the South African context. We also investigate whether a commonly used solution to factor omission in macroeconomic factor models, the residual market factor, adequately reflects systematic influences not reflected by a set of macroeconomic factors. Our contribution lies in precisely quantifying the ability of macroeconomic and residual market factors to proxy for systematic drivers of returns. Systematic influences are represented by statistically derived factor scores which are then related to a set of carefully selected macroeconomic factors. We find that the identification of macroeconomic factors that proxy for systematic influences is a challenge in itself. Once identified, macroeconomic factors are poor and unstable proxies for systematic influences and the use of a residual market factor does not significantly improve the approximation of factor scores. Our conclusion is that macroeconomic linear factor models are likely to be underspecified, even if a residual market factor is included. This has implications for researchers, investors, econometricians and economists that rely on macroeconomic factor models to study financial markets.
Szczygielski, Jan Jakub; Brummer, L.M., 1940-; Wolmarans, Hendrik Petrus(Taylor and Francis, 2020)
This empirical paper comprehensively sets out the impact of underspecification on a key foundational concept in empirical finance, the linear factor model. It places emphasis on the extensive consequences of factor omission ...
Cleophas, L.G.W.A. (Loek); Kourie, Derrick G.; Watson, Bruce William(Computer Society of South Africa, 2014-08)
In indexing of, and pattern matching on, DNA and text sequences, it is often important to represent all factors of a
sequence. One e cient, compact representation is the factor oracle (FO). At the same time, any classical ...
Verwoerd, Daniel Wynand; Myer, M.S.; Garnett, H.M.; Bigalke, R.D.(Published by the Government Printer, Pretoria., 1987)
Both growth-inhibitory and growth-stimulatory factors were detected in vitro in medium from chemotactically
stimulated cultures of lung lavage cells. The macrophage component of the lavage cells was found to
produce a ...