Style characteristics and the cross-section of JSE returns

Abstract

This study investigates the ability of a broad range of 'style-based' characteristics to forecast monthly returns on JSE Securities Exchange SA shares. After being pruned for thinly traded stocks, the complete McGregor/Bureau of Financial Analysis (McG/BFA) JSE database is analysed using monthly cross-sectional regressions over the decade of the 1990s. A number of interrelated 'value' effects (price-to-NAV, dividend yield, price-to-earnings, cash flow-to-price and price-to-profit) together with a small firm effect are documented. All permutations of individually significant characteristics are then tested in a multifactor setting. The analysis suggests a two-factor (size and price-to-earnings) style-based model of expected returns on the JSE.