n Investment Analysts Journal - Stock prices as a leading indicator of economic activity in South Africa : evidence from the JSE

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Most asset pricing theories suggest that stock prices are forward looking and reflect market expectations of future earnings. By aggregating across companies, aggregate stock prices may then be used as leading indicators of future real GDP and real industrial production. A Hodrick and Prescott (1981) filter is used to detrend the data which is compiled on an annual and quarterly basis. An autoregressive model is constructed to test whether the cycle of real stock prices can be a useful indicator of the cycle of real economic activity. The results from this study using both quarterly and annual data show that in a South African context, the cycle of real stock prices on the JSE leads the cycle of real economic activity.


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