Employing the prespecified variable approach to APT factor identification on the segmented Johannesburg Stock Exchange

Paul van Rensburg

South African Journal of Accounting Research, 1997, vol. 11, issue 1, 57-74

Abstract: Prior research has provided evidence that the return generating process on the Johannesburg Stock Exchange (JSE) is dichotomous in nature (Campbell, 1979; Gilbertson and Goldberg, 1981;Carter, 1983; Page, 1986, 1989; Venter, Bradfield and Bowie, 1992). More specifically, this prior work supports the contention that there exists a cleavage in the economic forces underlying returns on the mining and industrial sectors of the JSE.In this paper the implications are considered for financial researchers applying linear factor models (LFMs) to describe the return generating processes underlying both mining and industrial shares on the JSE. A factor analytic augmentation to LFMs using prespecified explanatory variables is motivated. This suggestion is applied to the LFM underlying the Ross (1976) APT and it is empirically examined to what extent the factor analytic augmentation contributes to explaining both the time series and cross section of JSE returns.

Date: 1997
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DOI: 10.1080/10291954.1997.11435069

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