Stock prices indicate economic activity in South Africa : A case study of the JSE
Most asset pricing theories suggest that stock prices are forward looking and reflect market expectations of future earnings. However, in this paper, by aggregating across companies, aggregate stock prices may then be used as leading indicators of future real GDP and real industrial production. In order to detrend the data, a Hodrick and Prescott filter is used which is compiled on an annual and quarterly basis. The results from this study using both quarterly and annual data show that in a South African context, the cycle of real stock prices on the JSE leads the cycle of real economic activity. Additionally,an autoregressive model is constructed to test whether the cycle of real stock prices can be a useful indicator of the cycle of economic activity.
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