A Vector Error Correction Model (VECM) of FTSE/JSE SA Listed Property Index and FTSE/JSE SA Capped Property Index

Abstract

In this paper, the efficient market hypothesis (EMH) will be investigated from an empirical and theoretical basis. The closing (Closet), intraday high (Hight), intraday low (Lowt) and opening (Opent) values of the FTSE/JSE SA Listed Property Index (FTJ253) and the FTSE/JSE Capped Property Index (FTJ254)will explore the impact on returns resulting from a one standard deviation shock. The examination of the interrelationship between the closing (Closet), intraday high (Hight), intraday low (Lowt) and opening (Opent) values of the FTSE/JSE SA Listed Property Index (FTJ253) and the FTSE/JSE Capped Property Index (FTJ254) was conducted by making use of the Johansen cointegration test, a vector error correction model (VECM) and an impulse response function. The results of these tests provided an indication of the short- and long-run dynamics of all the variables included and the reaction of the variables to a one standard deviation shock. The results obtain indicate that there is an opportunity for arbitrage when the price deviates from the long-run equilibrium until a new equilibrium is reached.