Abstract:
The establishment of the Altx exchange provided the opportunity for investors to
invest in small high growth companies which sometimes provide spectacular returns.
The firms listed on the Altx JSE exchange have provided exceptional returns in the
South African market over the last few years and in March 2007 the price earnings
ratio on the Altx exchange was 1.4 times that of the JSE main exchange.
Investors wanting extraordinary gains would want to include these stocks in their
portfolios, but a valid asset pricing model is needed for these assets to be
considered for inclusion in a portfolio. Previous studies have shown that the
traditional capital asset pricing model is difficult to apply to assets of this nature.
Three widely. used models of increasing complexity are identified to be tested with
securities listed on the AltX exchange. These models are the Capital Asset Pricing
Model; the Fama-French Three Factor Model and the Arbitrage Pricing Theory.
The predictive qualities, of all three models are evaluated using a Two Step
Regression methodology. The first step entails a series of time series regressions
that are used to determine the model factors. The predictive abilities of these factors
in the models are evaluated using a second series of cross sectional regressions
over all the companies.
Yearly data from the period 2000-2007 is used in the empirical study. This is a very
small amount of data and limits the applicability of the results obtained. None of the three models used passed all of the significance tests to show that their predictive
qualities are valid. It does however seem from the R2 values that the Fama-French
Three Factor Model and Arbitrage Pricing Theorem describe much more of the
variation in the expected returns of Altx listed stocks. It is suggested that these
results are confirmed in future studies using more data.
