Commodity Prices and Forecastability of South African Stock Returns Over a Century: Sentiments versus Fundamentals

Afees Salisu and Rangan Gupta

No 202144, Working Papers from University of Pretoria, Department of Economics

Abstract: We forecast real stock returns of South Africa over the monthly period of 1915:01 to 2021:03 using real oil, gold and silver prices, based on an autoregressive type distributed lag model that controls for persistence and endogeneity bias. Oil price proxies for fundamentals, while gold and silver prices capture sentiments. We find that the metrics for fundamentals and sentiments both predict real stock returns of South Africa, with nonlinearity, modelled by decomposition of these prices into their respective positive and negative counterparts, playing an important role in terms of forecasting when a longer out-of-sample period spanning over three-quarters of a century is used. When compared to fundamentals, sentiments, particularly real gold prices, have a relatively more stronger role to play in forecasting real stock returns. Further, the predictability of stock returns emanating from fundamentals and sentiments is in line with the findings over the same period derived for two other advanced markets namely, the United Kingdom (UK) and the United States (US), but the stock market of another emerging economy, i.e., India covering 1920:08 to 2021:03, unlike South Africa, is found to be completely unpredictable. In other words, South Africa, in terms of its predictability, behaves like a developed stock market. Finally, given the importance of platinum and palladium for South Africa, our forecasting exercise based on their real prices over 1968:01 to 2021:03, depicts strong predictive content for real stock returns, thus again highlighting the importance of behavioral variables. However, these prices do not necessarily contain additional information over what is already available in gold, silver and oil real prices. Our results have important implications for academicians, investors and policymakers.

Keywords: Commodity prices; real stock returns; emerging and developed markets; forecasting (search for similar items in EconPapers)
JEL-codes: C22 C53 G15 G17 Q02 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2021-06
New Economics Papers: this item is included in nep-fdg, nep-fmk, nep-for and nep-his
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:202144

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