Abstract
M.Com. (Financial Management)
Researchers are not satisfied with models that explain share price variations based
on net present value analysis. To overcome the traditional problems of net present
value analysis, intrinsic bubbles and the dividend price ratio were investigated to
explain share price volatility. An index derived from dividend paying shares listed on
the Johannesburg Securities Exchange Limited (JSE Ltd) for the period January
2000 to December 2010 was investigated. This investigation was based on Froot
and Obstfeld’s (1991) Intrinsic Bubbles model. The null hypothesis of no intrinsic
bubbles was not rejected. The findings infer that share prices were not only driven by
fundamentals, implying the presence of intrinsic bubbles. This is consistent with the
findings of Brooks, Nneji and Ward (2011) after applying the same methodology on
the US housing market. The researcher’s aim was to provide a better clarification on
whether changes in fundamentals are suitable to predict share prices, but results
were inconclusive in this regard. The results indicate that fundamentals account for
80.1% of share price movements.