Title: Multifactor explanation of security returns in South Africa

Authors: Osita Chukwulobelu; Samuel Fosu; William Coffie

Addresses: Birmingham City University, City Campus, Perry Barr, Birmingham B42 2SU, UK ' Birmingham Business School, University of Birmingham, University House, Birmingham, West Midlands B15 2TY, UK ' University of Wolverhampton Business School, Nursery Street, Wolverhampton WV1 1AD, UK

Abstract: This paper evaluates the performance of the Fama and French three-factor model in South Africa for individual securities. We employed a multivariate time series methodology similar to Fama and French. The empirical results contradict the theoretical proposition of the Fama-French model and are inconsistent with the results documented by most studies in the developed and some emerging markets. The size and value premia are very weak when included in the regression model. Furthermore, the Fama and French three-factor model is unable to explain the return-generating process of securities trading on the Johannesburg Stock Exchange. This has important implication for corporate managers, investors as well as fund and portfolio managers in terms of estimating cost of equity, rate of return and portfolio allocation.

Keywords: security returns; South Africa; Fama-French three factor model; Johannesburg Stock Exchange; size premia; value premia; multivariate time series; securities; regression modelling; return generating; equity costs; rate of return; portfolio allocation.

DOI: 10.1504/IJMP.2014.065236

International Journal of Management Practice, 2014 Vol.7 No.4, pp.380 - 397

Published online: 16 Oct 2014 *

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