Excess Co-Movement in Asset Prices: The Case of South Africa

Abstract

The paper investigates excess co-movement in asset prices in South Africa between 1995 and 2005 using the definition of excess co-movement as correlation between two asset prices beyond what could be explained by key economic fundamentals. The results of the study suggest that there is excess co-movement between returns on equities and bonds in South Africa. The findings suggest that there are considerable noise traders on the financial market in South Africa. The result of this behaviour would be the tendency for the equity and bond prices to move together more than would be predicted by their shared fundamentals. These results are consistent with the possibility that a fad or crowd psychology plays a role in the volatility on the market for the two asset classes.

Notes

1. The literature suggests the existence of five major asset classes, namely, cash, equities, bonds, exotics (derivatives, hedge funds etc.,) and property.

2. Two commodities are deemed unrelated if their cross-price elasticities of demand and supply are insignificant.

3. The Fama-French factors are related to microeconomic fundamentals (Fama and French, 1992; 1993 and 1995).