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    The impact of COVID-19 on the South African stock market: a sectoral-level analysis.
    (2024) Ramterath , Akshay Saish.; Peerbhai , Faeezah.
    The novel 2019 Coronavirus (COVID-19) quickly spread all over the world. It dramatically affected the financial markets in almost every country, creating substantial uncertainty permeating every aspect of life and business. Investors and markets are facing a high degree of volatility regarding the physical and financial impacts of the virus. Behavioural Finance studies are steadily emerging, highlighting the impact of investors' emotions on their investment decisions in stock markets during macroeconomic events. Existing research of the pandemics impact on volatility and/or stock returns have predominantly focused on the overall performance of the South African stock market with limited evidence on the industry specific impact. This study therefore aims to analyse the impact of COVID-19 on the 8 largest industry sectors of the Johannesburg Stock Exchange (JSE). In particular, the study attempts to evaluate the impact of COVID-19 on industry performance, stock returns, trading volume, stock volatility and COVID-related investor sentiment. These research objectives are analysed using a variety of different methodologies, such as an event study, and GARCH (1,1) model. With existing global studies indicating a rise in the importance of industry specific factors which aid in the pricing of equities, a study of this sort is imperative to the South African investor. The sample in this study consists of daily data from the 8 largest sectors on the JSE and spans the period 1 January 2017 – 30 August 2022. The selected period ensured to include stock market performance before the COVID-19 outbreak, allowing a more accurate comparison of industry performance. The results of this study suggest that the COVID-19 pandemic had a significant impact on all sectors of the JSE included in this paper, both in the short-term and long-term. Some sectors gained from the impact of the pandemic and others suffered - with the number of the sectors negatively impacted outweighing the number of sectors positively impacted. Furthermore, the findings of this study suggest significant implications for investors and policymakers. For investors, it is suggested that they be cognisant of how industry sector idiosyncrasies affect company performance during crises. Investors who seek a healthy return on their investment should avoid investing in sectors that are more vulnerable in times of crisis and negatively impacted by the COVID-19 pandemic. However, risk-seeking investors may opt to invest in higher-risk sectors since these stocks may generate higher returns due to an increased market risk premium. For policymakers, the findings of this study indicate that the implementation of strict lockdowns in times of crisis be carefully implemented as many sectors were not able to recover from the implications brought on by this policy, crippling further operation of many companies. Regulators should be cautious of the effect of such policies on industries and the economy as a whole. Policymakers must customise such policies based on the characteristics or nature of each market sector.
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    Determinants of spending habits: a case study of University of KwaZulu-Natal students.
    (2017) Obagbuwa, Oloyede.; Kwenda, Farai.
    As the cost of university education continues to increase, university students’ spending habits have become topical. Good spending habits among students will guarantee their financial stability. Spending habits are an aspect of financial behaviour; a component of financial literacy. Financial literacy comprises three components: financial knowledge, financial attitudes, and financial behaviours. The relationship between these components has been examined, especially among university students. However, the relationship between financial knowledge, financial attitude together with demographic characteristics and spending habits have not been welladdressed in the extant literature, particularly among university student’s in South Africa. This study aims to fill the knowledge gap on students’ spending by examining the determinants of their (university student’s) spending habits. This study uses spending habits as the dependable variable, and financial knowledge, financial attitude, gender, age, family background, racial group, years in university, the course of study and financial aid as independent variables. The study employed quantitative research method; it used questionnaire adapted from previous studies. The reliability of the scales for the constructs was confirmed using Cronbach Alpha and the coefficient values more than 0.70. A total of 479 completed questionnaires were collected and used for the study. The study employed Statistical Packages for Social Sciences (SPSS 24) to analyse the data. Descriptive statistics were used to analyse the demographic characteristics and the results were presented in tables and charts. Binary Logistic Regression and ANOVA were used to examine the relationship between the explanatory variables and the dependable variable. The finding revealed that financial attitude can influence students’ spending habits while other explanatory variables did not have a significant influence on students’ spending habits. The study further sought to investigate the significant relationship between gender and spending habits, the course of study and spending habits, and racial groups and spending habits using Crosstabulation and Chi-Square analysis. The findings shows that there is no statistically significant relationship between gender and spending habits, the course of study and spending habits, and racial groups and spending habits of the respondents. These findings suggest that a financial literacy programme by the university authority with emphasis on financial attitudes will enhance the good spending habits of the students. However, the research findings only reflect the responses of the study population of the College of Law and Management as well as College of Humanities of the University of KwaZulu-Natal.
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    An analysis of herd behaviour in the South African stock exchange.
    (2013) Niyitegeka, Olivier.; Tewari, Devi Datt.
    The stock market is an important part of the economy of a country. It plays a crucial role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. This is the reason that the government, industry and the country in general keep a close watch on the happenings of the stock market. It is in this frame of mind that the current study investigates the presence of herd behaviour in the South African stock market. Herd behaviour occurs when investors disregard their individual information and base their trading decision on the actions of others. Herd behaviour was measured by testing whether or not there is a negative relationship between the dispersion of stock returns and the market return. The study also investigates whether herd behaviour is asymmetric in different market conditions, namely bull versus bear markets, highly volatile markets versus less volatile markets and high trading volumes versus low trading volumes. The results point towards a considerable presence of herd behaviour among investors at the Johannesburg Stock Exchange (JSE). An analysis of the asymmetric effect of herding on various market conditions reveals that herding is more pronounced during a bull market than a bear market, during low trading volume rather than high trading volume periods and is more prevalent during periods of low market volatility than in highly volatile markets. This study also used the Autoregressive Distributed Lag (ARDL) approach to cointegration in order to examine short- and long- term dynamics of investors’ herd behaviour at the JSE. The study noted that herd behaviour is not instantaneous; rather it takes place with a lapse in time. However, the unrestricted error correction results suggest that herd behaviour has a rather high speed of adjustment, implying that herding is a short-lived phenomenon.
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    An analysis of herd behaviour in the South African stock exchange.
    (2013) Niyitegeka, Olivier.; Tewari, Devi Datt.
    The stock market is an important part of the economy of a country. It plays a crucial role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. This is the reason that the government, industry and the country in general keep a close watch on the happenings of the stock market. It is in this frame of mind that the current study investigates the presence of herd behaviour in the South African stock market. Herd behaviour occurs when investors disregard their individual information and base their trading decision on the actions of others. Herd behaviour was measured by testing whether or not there is a negative relationship between the dispersion of stock returns and the market return. The study also investigates whether herd behaviour is asymmetric in different market conditions, namely bull versus bear markets, highly volatile markets versus less volatile markets and high trading volumes versus low trading volumes. The results point towards a considerable presence of herd behaviour among investors at the Johannesburg Stock Exchange (JSE). An analysis of the asymmetric effect of herding on various market conditions reveals that herding is more pronounced during a bull market than a bear market, during low trading volume rather than high trading volume periods and is more prevalent during periods of low market volatility than in highly volatile markets. This study also used the Autoregressive Distributed Lag (ARDL) approach to cointegration in order to examine short- and long- term dynamics of investors’ herd behaviour at the JSE. The study noted that herd behaviour is not instantaneous; rather it takes place with a lapse in time. However, the unrestricted error correction results suggest that herd behaviour has a rather high speed of adjustment, implying that herding is a short-lived phenomenon.
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    The effect of inclusions and exclusions of stocks from the JSE Top 40 and FTSE/JSE mid cap indices on liquidity.
    (2022) Naicker, Milanca.; Peerbhai, Faeezah.
    The inclusion and deletions of stock from the equity indices provide an important insight into a company’s performance. There is evidence there are no studies on the effects of inclusions and exclusions of liquidity in a South African market as previous studies in such a market relates to price and index rebalancing effects as a result of inclusions and exclusions to the FTSE/JSE and JSE Top 40. The insights that international studies provide are useful and these effects explored in a South African context would be useful and close the gap in this area of research and this is one of the main aims of the study. The lack of studies analysing the impact on liquidity as a result of inclusions and exclusions to the JSE Top 40 and Mid Cap Index is a disadvantage to South African investors, companies, and regulators. Therefore, the primary objective of this study is to investigate the effect of inclusions and exclusions on the Top 40 and Mid Cap Index on liquidity as well as to determine how does the size of a firm impacts the liquidity effects of an index addition or deletion. The paper seeks to determine these effects by using an event study methodology by regressing a number of different liquidity proxies (turnover, aggregate turnover, bid-ask spread, percentage spread and Amihud Illiquidity measure) using daily data for the companies that have been included and excluded from the indices. This study analyses 44 inclusions and exclusions on the JSE Top 40 and 73 and 81 inclusions and exclusions on the Mid Cap index from January 2010 to December 2020. The results from this study provide important insights into the effects of index revisions and firm size on liquidity. For stocks that form part of the inclusions to an index, there in an increase in liquidity as a result of the increased trade after the stock was included in the Top 40 and provides support from the Downward Sloping Demand Curve Hypothesis, Price Pressure Hypothesis and Liquidity Cost Hypothesis. For exclusions stocks, shows a decrease in volume traded and increasing spreads for the Top 40 and indicates that this diminished liquidity observed for such companies that find themselves excluded in both the Top 40 and Mid Cap indices which supports the information cost liquidity hypothesis.
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    The effect of disaggregated country risk on the South African equity portfolio returns under changing market conditions.
    (2022) Jaffar, Sandisele Ayesha.; Muzindutsi, Paul-Francois.; Habanabakize, Thomas.
    Globalization has resulted in the rapid increase of international trade and international mobility of financial capital. Capital inflows into South Africa date back to the early 1990s and these inflows continue to grow. With increased investments into the country, investors can diversify some local risks. Still, they also become exposed to the different components of country risk (political, financial, and economic risk). However, depending on the investor's risk appetite, country risks may encourage or discourage foreign portfolio investments. This study examined the effects of disaggregated country risk on South African equity portfolio returns under changing market conditions. Additionally, this study compared how South African domestic and foreign equity portfolios respond to changes in country risk components under bearish and bullish market conditions. A Markov switching approach was employed to analyse monthly data of 19 equity portfolios for the sample period spanning from January 2000 to December 2019. The results suggested that domestic and foreign portfolios spent more time in downward trends. Moreover, the effects of country risk components depend on market conditions for both domestic and foreign portfolios. In both cases, the impact of country risk components is more significant in bull than in bear market conditions. Essentially, economic and financial risk had a more substantial impact on domestic portfolios, whereas political risk was more significant on foreign portfolios. In this way, political risk cannot be diversified through investing in foreign portfolios. These findings have crucial implications as they indicate that it is vital to maintain a stable economic, financial and political environment to encourage sustainable portfolio investment.
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    Measuring the impact of Covid-19 on banking sector returns, profitability, and liquidity in South Africa.
    (2022) Naidoo, Dashami.; Peerbhai, Faeezah.; Kunjal, Damien.
    Abstract available in PDF.
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    Cryptocurrency volatility, volatility spillovers and the effect of global investor sentiment.
    (2021) Rathilal, Sahil.; Muguto, Hilary Tinotenda.; Nhlapo, Rethabile.
    Cryptocurrencies continue to enjoy attention from investors and policymakers and their growing usage has fortified this attention. However, it is their volatility and the volatility spillovers among the cryptocurrencies have been most intriguing. Various factors such as susceptibility to speculative pressures, uncertainty regarding their valuation, and the lack of regulation have been forwarded as possible explanations. However, these factors have not fully explained cryptocurrency volatility and volatility spillovers, suggesting that there could be other salient factors. In this study, investor sentiment, described as the noise-driven investors' perception of the risk and cash flows of an asset, was forwarded as one of those salient factors. Specifically, this study sought to examine the nature of volatility and volatility spillovers among currencies and their subjectivity to global investor sentiment. Bitcoin, Ethereum and Ripple and an investor sentiment index constructed from a set of five proxies over a period spanning February 2018 to August 2021 were employed. For the analysis, the study employed GARCH models to examine the nature of cryptocurrency volatility, the ADCC-GARCH framework and the Diebold-Yilmaz spillover index to examine the nature of cryptocurrency volatility spillovers, and the Toda-Yamamoto model to examine the causality between cryptocurrencies and investor sentiment. The study found evidence of significant sentiment effects in both mean and variance equations of the cryptocurrencies. Similarly, the analysis of comovements and spillovers showed that there were significant sentiment effects on the phenomena. Failure to account for investor sentiment could, therefore, lead to poor estimation of volatility and volatility spillovers. The results have implications for investors, speculators, and policymakers alike. The results obtained provided an insight on the effect of investor sentiment on cryptocurrency volatility and showed how the market reacts to the investors' behaviour where their actions influence volatility. The investors and speculators may then use the insight on sentiment to determine the market volatility to earn returns accordingly. Further, policymakers can use this to determine the optimal regulations to prevent excessive volatility in this market. The study, therefore contributes to the debate on the drivers of cryptocurrency volatility. It also contributes to literature by introducing a measure of investor sentiment.
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    Residential property as a hedge against inflation in South Africa.
    (2021) Ramsaran, Nikita.; Moores-Pitt, Peter Brian Denton.
    The empirical evidence regarding the magnitude of the relationship between inflation and residential property has had conflicting results. Although the issue of inflation-hedging has been discussed by multiple authors, the results have been inconsistent with regard to the ability of property to act as a hedge against inflation. This topic has been explored largely in an international context, with limited studies on South African grounds. Over the years the topic of inflation-hedging has been examined using multiple cointegration techniques, which have been adapted over the years to accommodate various limitations. The conventional Autoregressive Distributive Lag (ARDL) model has been a solid model for the purpose of this topic as it has proven to have various advantages over other models. However, this model assumes linearity and symmetry with regard to the relationship. In order to overcome the limitations of this model, the Nonlinear Autoregressive Distributive Lag (NARDL) model was developed, as it accounts for possible asymmetric adjustment. Both these models were employed for the purpose of this study with the intent of determining whether the relationship between the variables is nonlinear and asymmetric. This study utilized quarterly data for a 30-year time period from 1989-2019, a period which was extremely relevant in the context of South African history, because of the transition period from the apartheid regime. The data chosen for the inflation rate is represented by the consumer price index (CPI) and housing prices was represented by both the housing price index (HPI), as well as segmented housing prices. The results from this study confirmed that property is able to hedge against inflation, with strong evidence supporting the existence of an asymmetric relationship between the variables. All segments were confirmed to effectively hedge against inflation, with only the affordable segment being a partial hedge for the purpose of the NARDL model. Evidence of asymmetry was confirmed, indicating that when inflation increases, housing prices increase at a rate greater than unity. However, in periods of decreasing inflation, the increase in absolute value is far greater. Investors can, therefore, profit off investing in property during all inflationary periods, and generate greater wealth in periods of decreased inflation.
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    An analysis of share prices and economic activity in South Africa: an NARDL approach.
    (2021) Naidoo, Thiasha.; Moores-Pitt, Peter Brian Denton.
    An integral component of economic activity rests on the performance of share prices as it influences consumer and business confidence which in turn affects the performance of the overall economy. The progressive characteristics of share prices and its successive role as an indicator of economic growth has been widely documented in advanced and developing economies such as South Africa but with evidence allowing for nonlinearity and asymmetric movements, being less predominant. The key objective of this thesis is to re-examine an existing issue by using a more complex method of analysis to determine whether fluctuations in the stock market influence the economic growth in South Africa. This study assesses share price fluctuations and its impact on economic growth, with the aim of identifying the nonlinearity and asymmetric effects in the relationship by taking into consideration a primary and sectoral analysis, within a South African context. As such, this study utilised various different methodological techniques that established cointegration; identified the existence of structural breaks; detected long and short-run relationships and determined the effects of nonlinearity and asymmetric adjustments between the stock market and economic activity, covering the period of 1999 to 2019. It was established that the relationship between economic growth and stock prices exhibit evidence of structural breaks. Furthermore, it was concluded that there is a strong link between the stock market and economic activity with the 2007/2008 global financial crisis. Most importantly, this thesis intended to determine the nonlinearity and asymmetric impacts that stock market fluctuations have on economic activity in South Africa. It was exhibited that there is evidence of strong nonlinear cointegration in the relationship. Additionally, there is a strong presence of nonlinearity and asymmetric adjustment in the relationship between stock market fluctuations and economic activity. Therefore, this study concluded that there is strong evidence of nonlinearity and asymmetric adjustment in the cointegrating relationship and depicted that economic growth is sensitive to stock market fluctuations in South Africa, which represents a novel contribution to the literature.
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    The impact of foreign ownership on firm performance: evidence from South Africa.
    (2020) Naidu, Delane Deborah.; Charteris, Ailie Heather.; Moores-Pitt, Peter Brian Denton.
    The inflow of Foreign Direct Investment (FDI) is an important source of finance for South Africa. The South African government continuously attempts to attract more FDI to improve economic growth. Several studies have examined the determinants and effects of FDI at a macroeconomic level in South Africa, but very little research has analysed the effects of FDI at a microeconomic level, where the focus is on firm performance. Foreign ownership sourced from FDI can have both direct and spillover (indirect) effects on firm performance. The absence of evidence regarding the effect of foreign ownership on firm performance raises questions about the impact of FDI at the firm-level in South Africa. Hence, this study seeks to determine the direct and horizontal spillover effects of foreign ownership on the financial performance of firms listed on the Johannesburg Stock Exchange (JSE). This study uses panel data for non-financial firms listed on the JSE, covering the seven-year period from 2012 to 2018. The system Generalized Method of Moments (GMM) approach is employed to estimate the relationship as it accounts for endogeneity, simultaneity and unobserved heterogeneity, thus ensuring unbiased results. Firm performance is measured with Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q. The results for the direct effects vary across performance measures, with a non-linear effect of foreign ownership identified only when ROE is used. The findings show that foreign ownership has a positive effect on ROE at levels of foreign ownership below 40.1% but a negative effect at higher levels of foreign ownership. No evidence of horizontal spillovers are found for any performance measures. The implications of these findings are discussed along with recommendations for future research.
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    Financial risk management and bank profitability in South African banks.
    (2017) Mafu, Sibusiso Mfundo.; Sibanda, Mabutho.
    This study examined the connection between financial risk management and banks’ profitability in a South African context. The relationship was segmented into three major financial risks; credit risk, liquidity risk and market risk. Theory assumes risk to have a negative relationship with profitability; however, some studies have proved otherwise. This study used top five banks in South Africa over a10-year period spanning 2006 to 2015 and employed Fixed Effect Model based on the Hausman Test to estimate the relationship between credit, liquidity and market risk with profitability measure return on equity. “The credit risk indicators (independent variables) employed in this study are non-performing loans to total loans, and loans and advances to total deposit. Two control variables leverage ratio and logarithm of total asset as proxy for firm size were also used. All variables were regressed against ROE as a profitability measure (dependent variable). The findings indicate a significant relationship between profitability and non-performing loans, and leverage ratio at 1%, loans and advances to total deposit at 5%; while firm size (log total assets) is significant at 10% significance level. The liquidity risk indicators (independent variables) employed are loans and advances to total deposit, non-performing loans to total loans, LOG(total assets), market capitalisation to total assets, non-deposit dependence/external finance, equity to total assets. Control variables are non-performing loans, firm size (log total assets), GDP growth rate, and ratio of financing gap. The findings indicate that loans and advances to total deposit, non-performing loans, market capitalisation to total assets, and non-deposit dependence are significant at 1% significance level, firm size (log total assets), at 5% ; while equity to total assets, GDP growth and ratio of financing gap are insignificant. The market risk indicators (independent variables) employed with three main variables are market capitalisation (log stock) to proxy equity risk, exchange rate to proxy foreign exchange risk, and lending interest rate to proxy interest rate risk. Three control variables were employed; inflation rate, GDP and monetary supply (M3). The findings show market capitalisation (log stock) is significant at 1%, exchange rate and GDP are significant at 10% significance level. An insignificant and negative relationship with lending interest rate was found. With the control variables, the findings showed that there is an insignificant and positive relationship between inflation rate and return on equity and a negative relationship between GDP and return on equity. The results are in conflict with the expected sign. The study suggests that, with regards to credit risk, banks in South Africa should enhance their capacity in credit analysis and loan administration while the regulatory authorities should pay more attention to banks’ compliance to relevant regulatory requirements by the Basel Committee on Banking Supervision, put more effort in attracting deposits as they are a major determinant of liquidity followed by external funding liability and seek for effective hedging strategies to deal with the market risk volatilities.
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    Effect of macroeconomic variables on stock returns under changing market conditions: evidence from the JSE sectors.
    (2020) Moodley, Fabian.; Nzimande, Ntokozo Patrick.; Muzindutsi, Paul-Francois.
    The equity market is seen as one of the key determinants of the fraternity of finance, as it unites investors with ambitions to invest in marketable instruments to earn a return on their investments. The equity market not only unites investors with similar ambitions, but is an important economic stimulus because it contributes a significant portion to economic growth. Underlying financial theories illustrate an interaction between stock market returns and macroeconomic variables. However, recently a debate has arisen in relation to the type of effect that is evident between macroeconomic variables and stock market returns. This debate is centred on the efficient market hypothesis (EMH), which depicts a linear effect and the adaptive market hypothesis (AMH), which advocates for a nonlinear affect. Thus, there is no empirical agreement regarding the relationship between macroeconomic variables and stock market returns. In an attempt to contribute to the debate, the study examined the interaction between macroeconomic variables and the Johannesburg Stock Exchange (JSE) indices returns under changing market conditions. The study’s objective was to establish the effect between macroeconomic variables and stock market returns in a bullish and a bearish market condition and to compare the expected duration of each market condition among the selected JSE index returns. The study used the Markov regime-switching model of conditional mean with constant transition probabilities. Moreover, preliminary tests in the form of graphical visualisations, descriptive statistics, correlation tests, unit root tests and stationarity tests with and without structural breaks were considered. The variables that formed part of the JSE consisted of the real values associated with the JSE All-Share Index, Industrial Metals and Mining Index, Consumer Goods 3000 Index, Consumer Services 5000 Index, Telecommunications 6000 Index, Financials 8000 Index and the Technologies 9000 Index. The macroeconomic variables included the real values of inflation (CPI) rate, industrial production rate, short-term interest rate, long-term interest rate, money supply (M2) and real effective exchange rate (REER). The JSE index returns series and the macroeconomic variable series contained monthly data that ranged from January 1996 to December 2018. The findings of the regressed model illustrated the JSE All-Share Index returns are negatively affected by long-term interest growth rate in a bull market condition, by short-term interest growth rate in a bear market condition, and positively affected by industrial production growth rate in a bear market condition. The Industrial Metal and Mining Index returns are negatively affected by inflation growth rate in the bear market condition. The Consumable Goods Index returns are positively influenced by growth rate of real effective exchange rate in a bullish market condition, negatively affected by inflation growth rate, short-term interest growth rate and growth rate of REER in a bear market condition. The Consumable Service Index returns are negatively affected by short-term interest growth rate in a bull market condition and long-term interest growth rate in a bear market condition. The Telecommunication Index returns are negatively affected by long-term interest growth rate in the bull and bear market conditions and positively affected by growth rate of REER in a bear market condition. The Financial Index returns are negatively affected by long-term interest growth rate in a bull and bear market and short-term interest growth rate in a bear market condition. The Technologies Index returns are positively affected by growth rate of REER in a bull market condition. Moreover, the bull market condition prevailed the longest across the JSE selected indices. The findings of this study are consistent with AMH as it suggests that the efficiency and inefficiency of equity markets are owing to changing market conditions. Hence, macroeconomic variables affect the stock market returns differently under changing market conditions. Moreover, the findings were seen to contradict EMH as it suggests equity markets are efficient. As a result, the alternating efficiency effect under changing market conditions suggests that the effect of macroeconomic variables on stock market returns is explained by AMH and could be better modelled by nonlinear models. Thus, policymakers should consider that the effect of macroeconomic variables on JSE index returns varies with regimes and, therefore, develop appropriate policies.
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    The risk-return relationship and volatility feedback in South Africa: a nonparametric Bayesian approach.
    (2020) Dwarika, Nitesha.; Moores-Pitt, Peter Brian Denton.; Chifurira, Retius.
    The risk-return relationship is a fundamental concept in finance and economic theory and is also known as the “first fundamental law” in finance. Traditionally, the risk-return relationship is known to help assist individuals in the construction of an efficient portfolio where a desired risk and return profile is tailored to their needs. However, it is a source of much more valuable information to various market participants such as bankers, investors, policy makers and researchers alike. There are a number of investment strategies, policy frameworks, theories and asset pricing models built on the empirical result of the risk-return relationship. Hence, the topic of the risk-return relationship is of broad importance. It has been widely investigated on an international scale, especially by developed markets from as early as the 1950's, with the primary motive being to help market participants optimise their chance to earn higher returns. According to conventional economic theory, the relationship between risk and return is a positive and linear relationship – the higher the risk, the higher the return. However, there are many studies documented in literature which show a positive or negative or no relationship at all. As a result, due to the magnitude of conflicting results over the years, this has caused an international and local debate to arise regarding the risk-return relationship. International studies have explored a number of theories and models to attempt resolving the inconclusive empirical backing of the risk-return relationship. On the other hand, the methods employed by South African studies and the volume of literature on the topic is relatively limited. South Africa is becoming increasingly more recognised, liberalised, interactive and integrated into the international economy. Therefore, this study makes a significant contribution from a South African market perspective. This study identifies volatility feedback, a stronger measure of regular volatility, as an important source of asymmetry to take into account when investigating the risk-return relationship. Given that South Africa is an emerging market which is subject to higher levels of volatility, one would expect the presence of this mechanism to be more pronounced. Thus, this study investigates the risk-return relationship once volatility feedback is taken into account by its magnitude in the South African market. A valuable contribution of this study is the introduction of the novel concept “asymmetric returns exposure” which refers to the risk that arises from the asymmetric nature of returns. This measure has a certain level of uncertainty attached to it due to its latent and stochastic nature. As a result, it may be ineffectively accounted for by existing parametric methods such as regression analysis and GARCH type models which are prone to model misspecification. The results of this study are presented according to the robustness of the approaches in the build up to the final result. First, the GARCH approach is employed and consists of a symmetric and asymmetric GARCH type models. The GARCH approach is treated as a preliminary test to investigate the presence of risk-return relationship and volatility feedback, respectively. While the GARCH type models have the ability to take into account the volatile nature of returns, asymmetries and nonlinearities remain uncaptured by the probability distributions governing the model innovations. Thus, the results of the GARCH type models are inconsistent and not statistically sound. This motivates the use of a more robust method, namely, the Bayesian approach which consists of a parametric and nonparametric Bayesian model. The Bayesian approach has the ability to average out sources of uncertainty and measurement errors and thus effectively account for “asymmetric returns exposure”. The test results of both the parametric and nonparametric Bayesian model find that volatility feedback has an insignificant effect in the South African market. Consequently, the risk-return relationship is estimated free from empirical distortions that result from volatility feedback. The result of the parametric Bayesian model is a positive and linear relationship, in line with traditional theoretical expectations. However, it is noteworthy that in the context of this study that the nonparametric approach is highlighted over the parametric approach. The nonparametric approach has the ability to adjust for model misspecifications and effectively account for stochastic, asymmetric and latent properties. It has the ability to take into account an infinite number of higher moment asymmetric forms of the risk-return relationship. Thus, the nonparametric Bayesian model estimates the actual fundamental nature of the data free from any predetermined assumptions or bias. According to the nonparametric Bayesian model, the final result of this study is no relationship between risk and return, in line with early South African studies.
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    Influence of the performance of Black Economic Empowerment shares on the Johannesburg Stock Exchange Top 40.
    (2020) Hargreaves, Megan Kate.; Sibanda, Mabutho.
    The study investigated the performance of Black Economic Empowerment (BEE) shares on the Johannesburg Stock Exchange (JSE). It employed data from 48 firms active on the JSE from 2003 to 2016. Unbalanced panel data was used as there were firms with no data for this period and they were omitted from the study when they were no longer part of the JSE Top 40. The fixed effects model results showed that BEE shares’ influence on share returns is insignificant, but that they do have an impact on firm value. It was found that when a BEE share is issued, the firm’s value increases by 0.522 when return on equity (ROE) is used and 0.45 when return on assets (ROA) is employed. A bootstrap technique was run on the fixed effects model in order to account for cross-sectional dependency. The bootstrap did not affect the outcome of the effect of BEE shares on share returns. However, the influence of BEE shares on the firm’s value became significant. These results are consistent with the existing literature which states that firms issue BEE shares in order to reap other benefits. Although BEE shares have no influence on share returns and firm value, it is recommended that firms continue to issue such shares in order to receive a higher BEE rating.
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    The performance evaluation and style analysis of socially responsible investment funds in South Africa.
    (2019) Naidoo, Jeremy Ebenezer.; Peerbhai, Faeezah.
    Socially Responsible Investing (SRI) has been widely acknowledged as an integral part of modern-day investment practice, gaining significant growth since its early history. While SRI consciousness has grown steadily in South Africa; there is a paucity of research on the effect of its restrictions on investor’s portfolios. Considering the limited studies documented, the extant research delves into the profile of the South African responsible investing industry, highlighting its vast development and investment strategies. To assess the viability of socially responsible investments and provide investors with the ability to make more informed decisions, scholars in finance have raised pertinent questions, primarily focused on the impact of utilising environmental, social and governance (ESG) criteria on socially responsible investment performance. As such, this study aimed to explore this research domain and position its results within the currently inconclusive literature. The objective of the study was to evaluate active SRI in South Africa, with a focus exclusively on SRI funds. The approach followed was twofold. Firstly, by employing the Fama and French 3-factor model and Carhart 4-factor model, the study assessed the risk-adjusted performance of SRI funds relative to their conventional counterparts (conventional funds and passive benchmarks) over two evaluation periods (2009-2013 and 2014-2018). The findings showed that after significant underperformance of SRI funds in the earlier period, they tend to perform better in the latter period. The improvement in performance over the study was termed a ‘learning effect’ - the older funds have finally caught up with conventional funds (or outperformed them) while funds that were launched recently still trail their conventional peers. Furthermore, the models showed similar findings for the market loading, size (SMB) and value (HML) factors – SRI funds exhibited a lower sensitivity to market fluctuations as compared to non-SRI funds, a higher exposure to small-cap stocks, and exhibited a larger exposure to growth stocks in the earlier period (2009-2013) while a greater exposure to value stocks in the latter period (2014-2018). The second research aim of the study made use of Return-Based Style Analysis (RBSA) to identify and compare the determinants of SRI funds to non-SRI funds (conventional funds). To date, this method has not been previously applied to SRI funds in South Africa. The findings of the RBSA model showed that SRI funds, on average, exhibited moderate to high levels of active management, which were also found to be substantially higher than non-SRI funds. This indicated that the imposition of additional constraints by SRI funds (through SRI criteria) does not hinder the fund manager from adding value through active management. Furthermore, the classifications of SRI funds were shown, on average, to comply with their investment mandates and relevant regulation, i.e. correctly classified. Taking into account the asset class exposures of SRI funds, the regression results showed that these exposures were found, on average, to almost mirror the exposures of the funds’ actual asset holdings. With respect to the comparative style analysis of SRI and non-SRI funds, a distinguishable asset class exposure was shown whereby SRI funds were found to have a value-tilt while non-SRI funds exhibited a growth-tilt over the evaluation period.
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    Firm size and the day of the week effect on the Johannesburg Stock Exchange.
    (2020) Mutemeri, Linah.; McCullough, Kerry-Ann Frances.
    The Efficient Market Hypothesis (EMH) asserts that stock prices always entirely reflect all available information and that stock prices follow a random walk, where future stock prices are not predictable based on historical prices (implying stock market efficiency). If the stock market is not efficient, abnormal returns can be realised by beating the stock market through observing and trading on certain patterns (anomalies) exhibited by past stock prices. Various anomalies have been documented, including the Day of the Week (DOW) effect (the tendency of a stock market to exhibit on average low daily returns in the beginning of the week (mostly on Mondays) and high returns towards the end of the week (mostly on Fridays). Examining the DOW effect is particularly interesting, as it demonstrates daily patterns on which investors can take advantage of this anomaly to realise excess returns on daily basis. One of the reasons that has been put forward as to what initiates the DOW effect, is measurement error as when a variable of interest either explanatory or dependent variable has some measurement error independent of its value. Thereby, leading to the notion that the DOW effect is present in medium and small markets or firms with low merchantability (firm size effect). However, from the South African literature, still has a gap about the existence of the DOW effect across firm sizes on the JSE and its cyclical (appearing or disappearing) changes over time. Firstly, the study examined the existence of the DOW effect on the JSE in firm sizes on a full sample (1995 to 2019) utilising daily log-returns. The best-fit models were selected from a family of GARCH models, EGARCH (2, 1) and EGARCH (3, 1) models better fitted the AltX and the large index respectively and TGARCH (3, 1) and TGARCH (1, 1) better fitted medium and small indices respectively. The results showed that the DOW effect exists on the JSE stock exchange in three out of all the four investigated indices (medium, small and AltX except the large), particularly the DOW effect existed more in returns than in the volatility of those returns. Secondly, a rolling window analysis was utilised to examine the changes of the DOW effect over 1995- 2019 where the best-fit model for each sub-period was utilised. The results showed that the existence of the DOW effect is not constant over time concluding a cyclical behaviour (appearing and disappearing in some sub-periods). However, the highest frequency of appearance of the DOW effect appeared in the medium, small and the AltX indices confirming the notion that the DOW anomaly is mostly found in companies with low capitalisation.
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    Investor overconfidence in the South African exchange traded fund market.
    (2020) Kunjal, Damien.; Peerbhai, Faeezah.
    In recent years, Exchange Traded Funds (ETFs) have transformed the investment management landscape. Despite the soaring popularity of ETFs, ETF traders may not always be rational. Mispricing of securities, excess trading volume, and excess return volatility present in financial markets can be attributed to the influence of the overconfidence bias. Several existing studies have explored the overconfidence bias in stocks markets, however, studies on investor overconfidence in ETF markets remain scanty. Therefore, the objective of this study is to investigate the presence of investor overconfidence in the South African ETF market. Vector Autoregressive (VAR) models are employed to examine the lead-lag relationship between market turnover and market return for the market of South African ETFs tracking domestic benchmarks and for the market of South African ETFs tracking international benchmarks from the inception of the first ETF till August 2019. Consistent with the overconfidence hypothesis, a positive and significant relationship between current market turnover and lagged market returns is found for both markets, even after controlling or market volatility and cross-sectional return dispersion. This relationship holds for both market and individual ETF turnover indicating that the overconfidence bias also influences the trading activities of individual ETFs in both markets. Additionally, using Exponential Generalised Autoregressive Conditional Heteroskedasticity (EGARCH) models, this study reports that overconfident trading exhibits a significant positive effect on the volatility of market return over the full sample periods. Notably, the sub-period analysis reveals that, there is a significant positive relationship between overconfident trading and market return volatility before and during the 2008 global financial crisis only in the market of ETFs tracking domestic benchmarks. However, for the post-crisis subsample, the positive effect of overconfident trading on market volatility is only significant for the market of ETFs tracking international benchmarks. These findings have important implications for ETF investors and traders who trade in the South African ETF market; investment management companies that guide investment decisions; as well as policymakers and regulators who are responsible for promoting the efficiency of the South African ETF market.
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    Testing the efficiency of the South African futures market for white maize : 1996-2006.
    (2010) McCullough, Kerry-Ann Frances.; Strydom, Barry Stephen.
    As in PDF.