Original Articles

Price earnings ratios on the Johannesburg Stock Exchange - Are they a guide to value?


This paper tests whether there is an equilibrium relationship between prices and earnings on the Johannesburg Stock Exchange (JSE). Such a relationship would hold if the JSE Index and index earnings were cointegrated, A full explanation of the technique of cointegration is provided. It is shown that prices and earnings on the JSE are not cointegrated, which is aconsistent with similar results obtained for the New York Stock Exchange. The paper then offers a more general explanation of prices on the JSE to include, in addition to earnings, the influence of world markets and political and exchange rate risk, on the value of the JSE as represented by its Industrial and Financial Index. It is found that the variables of these models of the JSE are in fact cointegated. This means that there have been forces driving long term equilibrium values on the JSE. Movements away from such equilibrium values have represented market beating opportunities Current prices are thus not the best estimate of future prices, suggesting that the JSE cannot be regarded as an efficient market.

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