Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269975 
Year of Publication: 
2020
Citation: 
[Journal:] Cogent Economics & Finance [ISSN:] 2332-2039 [Volume:] 8 [Issue:] 1 [Article No.:] 1817252 [Year:] 2020 [Pages:] 1-27
Publisher: 
Taylor & Francis, Abingdon
Abstract: 
The efficient market hypothesis describes an efficient market as one in which investors cannot consistently predict stock returns because prices instantly reflect all the information flowing into the market. However, return predictability has been documented in many markets. This study tests the predictability of returns using two valuation ratios-the dividend and earnings yields-on the South African market, at both aggregated and sectoral level. Unlike most studies in South Africa, this study employs an apposite present value model, accounts for structural breaks and investigates the non-linearity of the relationship between stock returns and valuation ratios. The results show that returns are predictable at both aggregated and sectoral levels. This finding has implications for market efficiency through enhanced price discovery which, in turn, has implications for investment and portfolio management. However, it should be noted that statistical significance may not translate to economic significance, so there is a need to determine the latter if one intends to use any strategy that relies on this evidence.
Subjects: 
disaggregated data
dividend yield
earnings yield
present value model
Return predictability
South Africa
JEL: 
G11
G12
G14
G15
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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