Macroeconomic Variables and South African Stock Return Predictability

Rangan Gupta and Mampho P. Modise

Economic Modelling, 2013, vol. 30, issue C, 612-622

Abstract: We examine both in-sample and out-of-sample predictability of South African stock return using macroeconomic variables. We base our analysis on a predictive regression framework, using monthly data covering the in-sample period between 1990:01 and 1996:12, and the out-of sample period commencing from 1997:01 to 2010:06. For the in-sample test, we use the t-statistic corresponding to the slope coefficient of the predictive regression model, and for the out-of-sample tests we employ the MSE-F and the ENC-NEW test statistics. When using multiple variables in a predictive regression model, the results become susceptible to data mining. To guard against this, we employ a bootstrap procedure to construct critical values that account for data mining. Further, we use a procedure that combines the in-sample general-to-specific model selection with tests of out-of-sample forecasting ability to examine the significance of each macro variable in explaining the stock returns behaviour. In addition, we use a diffusion index approach by extracting a principal component from the macro variables, and test the predictive power thereof. For the in-sample tests, our results show that different interest rate variables, world oil production growth, as well as, money supply have some predictive power at certain short-horizons. For the out-of-sample forecasts, only interest rates and money supply show short-horizon predictability. Further, the inflation rate shows very strong out-of-sample predictive power from 6-month-ahead horizons. A real time analysis based on a subset of variables that underwent revisions, resulted in deterioration of the predictive power of these variables compared to the fully revised data available for 2010:6. The diffusion index yields statistically significant results for only four specific months over the out-of-sample horizon. When accounting for data mining, both the in-sample and the out-of-sample test statistics for both the individual regressions and the diffusion index become insignificant at all horizons. The general-to-specific model confirms the importance of different interest rate variables in explaining the behaviour of stock returns, despite their inability to predict stock returns, when accounting for data mining.

Keywords: Stock return predictability; Macro variables; In-sample tests; Out-of-sample tests; Data mining; General-to-specific model (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 G12 G14 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Working Paper: Macroeconomic Variables and South African Stock Return Predictability (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:30:y:2013:i:c:p:612-622

DOI: 10.1016/j.econmod.2012.10.015

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