A time-series approach to testing the cash-flow beta on the JSE

ABSTRACT

Van Rensburg and Robertson (2003) stated that the CAPM beta estimated using share returns has little or no relationship with returns generated by size and value (proxied by price-to-earnings) sorted portfolios. This study intends to show that a reformulated CAPM beta, estimated using return on equity as opposed to share returns, unravels the size and value premium. The study makes use of vector autoregressive models in order to examine the short term effect of structural shocks to the cash-flow fundamentals of a share or portfolio of shares through impulse response functions as well as quantifying a long-term relationship between cash-flow fundamentals and share returns using a vector error correction model (VECM) specification.