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An augmented macroeconomic linear factor model of South African industrial sector returns

Jan Jakub Szczygielski (Department of Accounting and Financial Management, Faculty of Business and Law, Newcastle Business School, Northumbria University, Tyne, UK and Department of Financial Management, University of Pretoria, Pretoria, South Africa)
Leon Brümmer (Department of Financial Management, University of Pretoria, Pretoria, South Africa)
Hendrik Petrus Wolmarans (Department of Financial Management, University of Pretoria, Pretoria, South Africa)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 30 November 2020




This study aims to investigate the impact of the macroeconomic environment on South African industrial sector returns.


Using standardized coefficients derived from time-series factor models, the authors quantify the impact of macroeconomic influences on industrial sector returns. The authors analyze the structure of the resultant residual correlation matrices to establish the level of factor omission and apply a factor analytic augmentation to arrive at a specification that is free of omitted common factors.


The authors find that global influences are the most important drivers of returns and that industrial sectors are highly integrated with the global economy. The authors show that specifications that comprise only macroeconomic factors and proxies for omitted factors in the form of residual market factors are likely to be underspecified. This study demonstrates that a factor analytic augmentation is an effective approach to ensuring an adequately specified model.

Research limitations/implications

The findings have a number of implications that are of interest to investors, econometricians and researchers. While the study focusses on a single market, the South African stock market, as represented by the Johannesburg Stock Exchange (JSE), it is a highly developed and globally integrated market. In terms of market capitalization, it exceeds the Madrid Stock Exchange, the Taiwan Stock Exchange and the BM&F Bovespa. Yet, a limited number of studies investigate the macroeconomic drivers of the South African stock market.

Practical implications

Investors should be aware that while the South African domestic environment, especially political risk, has an impact on returns, global influences are the greatest determinants of returns. No industrial sectors are insulated from global influences and this limits the potential for diversification. This study suggests an alternative set of macroeconomic factors that may be used in further analysis and asset pricing studies. From an econometric perspective, this study demonstrates the usefulness of a factor analytic augmentation as a solution to factor omission in models that use macroeconomic factors to proxy for systematic influences that describe asset prices.


The contribution lies in providing insight into a large and well-developed yet understudied financial market, the South African stock market. This study considers a much broader set of macroeconomic factors than prior studies. A methodological contribution is made by estimating and interpreting standardized coefficients to discriminate between the impact of domestically and internationally driven factors. This study shows that should coefficients not be standardized, inferences relating to the relative importance of factors will differ. Finally, the authors unify an approach of using pre-specified factors with a factor analytic approach to address factor omission and to ensure a valid and readily interpretable specification.



Funding: This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.


Szczygielski, J.J., Brümmer, L. and Wolmarans, H.P. (2020), "An augmented macroeconomic linear factor model of South African industrial sector returns", Journal of Risk Finance, Vol. 21 No. 5, pp. 517-541.



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