The Evolving Efficiency Of The South African Stock Exchange

Abstract

This paper tests the weak-form efficiency in the South African stock exchange - the Johannesburg Securities Exchange (JSE) - under the hypothesis that emerging markets efficiency evolves through time as these markets constantly enhance their regulatory environment. The paper makes use of the time varying GARCH model in testing this hypothesis. In addition, the paper compares the out-of-sample forecast performance of the time varying and fixed parameter GARCH models in predicting stock returns in the JSE making use of MSE-F statistics for nested models proposed (McCracken, 1999). The findings of the paper show that the two models provide the same conclusion in showing that the JSE has been efficient during the period of the analysis. In addition, the time varying model outperforms the fixed coefficient model in predicting the JSE stock returns. This finding indicates that the time-varying parameter model adds a benefit in testing the weak-form efficiency or modelling stock return in the JSE.