Risk on The Johannesburg Stock Exchange

Abstract

The Capital Asset Pricing Model (CAPM) provides a parsimonious method for estimating security returns. However, the strong influence of mining shares on the Johannesburg Stock Exchange (JSE) has complicated the use of the CAPM in South Africa and some researchers have suggested that broad sectoral indices should be used as market proxies in place of the JSE Actuaries All Share Index. This calls for the use of more complex, multi-parameter models, such as those derived from Arbitrage Pricing Theory (APT).

This paper uses a multivariate graphical technique, correspondence analysis, to view the underlying structure of risk in the sectors of the JSE, It identifies three main groupings of the sectors; (1) precious metals and minerals, (2) other metals and minerals, and (3) industrial and financial shares. The CAPM, using the All Share Index as market proxy, is found to be an acceptable model for both mining and industrial shares. The Industrial and Financial index as market proxy does not define the major dimension of risk in these sectors; the dominant factors are identified as firm size and financial gearing.

Key Words:

• APT
• Beta
• CAPM
• Correspondence analysis
• Market proxy
• Segmented market
• Systematic risk