An econometric model of the South African stock market

Abstract

A wealth of literature exists concerning the modelling of stock markets, as well as the examination of the relationship between share prices and various economic factors, both theoretically and empirically. However, most studies use data for developed countries in their analyses, while the literature modelling emerging stock markets in general, and the South African stock market in particular, is quite sparse. This study develops a structural, theoretically-founded model of the South African stock market that is estimated using co-integration and error-correction techniques. These techniques respectively estimate the long-term equilibrium level or intrinsic value of the stock market, and the short-term fluctuations around the equilibrium level. According to the results, share prices are co-integrated with the variables dictated by the expected present value model of asset price-determination. The short-term fluctuations are determined by various factors such as interest rates, a risk premium, the exchange rate, foreign stock markets and other variables.