Structural Breaks and Predictive Regressions Models of South African Equity Premium

38 Pages Posted: 7 Sep 2013

See all articles by Goodness Aye

Goodness Aye

University of Pretoria - Department of Economics

Rangan Gupta

University of Pretoria - Department of Economics

Mampho Modise

University of Pretoria - Department of Economics

Date Written: April 1, 2013

Abstract

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) SupF statistic and the Bai (1997) subsample procedure in conjunction with the Hansen (2000) heteroskedastic fixed-regressor bootstrap. We also used the Elliott and Müller (2003) J 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.

Keywords: predictive regression model, equity premium, structural breaks, South Africa

JEL Classification: C22, C52, C53, G12

Suggested Citation

Aye, Goodness and Gupta, Rangan and Modise, Mampho, Structural Breaks and Predictive Regressions Models of South African Equity Premium (April 1, 2013). Frontiers in Finance and Economics, Vol. 10, No. 1, 49-86, 2013, Available at SSRN: https://ssrn.com/abstract=2304729

Goodness Aye (Contact Author)

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Mampho Modise

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

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