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Structural Breaks and Predictive Regressions Models of South African Equity Premium

Author

Listed:
  • 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)

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) 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.

Suggested Citation

  • Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2012. "Structural Breaks and Predictive Regressions Models of South African Equity Premium," Working Papers 201209, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201209
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    as
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    More about this item

    Keywords

    Predictive regression model; equity premium; structural breaks; South Africa;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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