MBA & MM Theses

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The Day of the Week Effect on the
(2015-05-15) Ioffe, Stanislav
This research examines the day-of-the-week effect on the JSE Securities Exchange for the period from 1995 to 2007. This effect was documented in the 1970s and 1980s. The first democratic election in 1994 left the international isolation of South Africa behind, and the financial markets opened up to foreign investors, bringing the possibility that political and economic changes could impact on market behaviour and anomalies. Time series of the JSE daily closing prices comprised JSE/Actuaries All Share Index (Code: CI01) for the period 1st of January, 1995 until 21st of June 2002 and FTSE/JSE All Share Index (Code: J203) for the period 24th of June, 2002 until 31st of December, 2007. The presence of the day of the week pattern was tested by conducting daily return mean variance examinations and formal statistical analysis of tradingtime hypothesis. The latter was implemented by means of regression analysis. The study shows that the day-of-the-week effect is no longer present on the JSE Securities Exchange. The absence of the systematic day-of-the-week pattern suggests that investors may have improved risk pricing due to higher efficiency of the stock market. It is not advisable for investors to use any kind of active trading strategy based on exploiting the previously reported day-of-the-week anomaly
The Performance of the Dow Investing Strategies on the JSE Securities Exchange
(2014-02-17) Kubelo, Mpho R.
A number of studies have been published to indicate that markets are not always efficient. Amongst these studies is a study that was conducted on the JSE Industrial companies using data for the period between January 1985 and December 1998. The study showed that investing in high dividend yield and high earnings yield companies using the Dow investing strategies an investor could outperform the industrial index. This current study sought to extend the earlier study on the performance of the Dow strategies by using data from the JSE Securities Exchange’s Industrial Average Index (INDI25) for the period between January 1999 and December 2012. The performance of the Dow strategies was compared with that of the INDI25 both before and after adjusting the returns for risk. The study also compared the performance of the dividend yield strategies against that of the earnings yield strategies. The findings of the study confirmed the outperformance of most of the Dow investment strategies as established by the earlier study and other studies conducted in international stock markets. This study however, found the dividend yield strategies to have outperformed the earnings yield strategies. This is contrary to earlier findings that found the earnings yield strategies to have outperformed the dividend yield strategies. The differences between the performances of the strategies were however found to be statistically insignificant
Does the underpricing phenomenon exist for IPO’s on the JSE?
(2014-02-17) Gouws, Ian Louis
It has been widely documented that many stock exchanges experience significant first day returns for listings stocks. In this current research it was undertaken to determine the level of underpricing on the JSE and identify factors that might significantly influence the underpricing. Offer price, share price movement, market movement as well as factors on, listing board, company age, listing underwriter/sponsor, listing size and offer price was collected for 84 companies listing in the period between June 2006 and June 2012. The first day returns, long run buy hold abnormal return (BHAR), pre-listing market movement was calculated. The relationship between first day returns and the factors were analysed by grouping. To establishing their ability to predict the first day returns a normal linear regression model was utilized. One significant relationship was established in the prediction of initial returns. The listing size was negatively related to underpricing, meaning that the bigger the company the more likely it is that the initial return would be smaller. As some authors established listing size a measure of risk it is inferred that risk associated with listing size plays a significant role in the initial return of listing shares. The second significant finding is that the economic sectors have statistically different levels of underpricing meaning listing a share in some sectors would result in different levels of initial returns. Thirdly, the offer price has significant differences in terms of initial return, in that listings with smaller offer prices underprice more than listings with bigger offer prices. The Long run performance for listings shares on the JSE has been seen to be poor with aftermarket share pricing declining from second month onwards for three years after listing.
The evolving use of technology in the South African capital markets
(2014-01-21) Comninos, Alexis
Since the move from floor to electronic trading, technology has played an increasingly important role in the capital markets. Current economic and capital markets developments are driving changes in technology use with several implications for the industry. A series of semi-structured interviews was conducted with participants in the South African capital markets to explore the evolution of technology in the South African capital markets. Key findings are as follows: 1) There is a shifting focus in technology use from cost reduction to competitive advantage 2) Regulatory reforms resulting from the 2008/09 financial crisis are driving increasing use of technology 3) Algorithmic trading and Direct Market Access (DMA) are increasing, but care orders are still a significant part of most brokers’ business 4) High Frequency Trading (HFT) is a niche market and the JSE is pursuing initiatives to grow HFT in the South Africa markets 5) Participants’ views on the impacts of HFT on market quality are mixed 6) Risks of a technology related failure such as the US flash crash are somewhat less in the SA market, but need to be mitigated 7) The increasing use of analytics and big data technologies is potentially one of the next major trends in the capital markets
Managing information assets by JSE listed companies in South Africa
(2014-01-21) Roodt, Edward George
is a key element of competitive advantage for every organisation because it is created internally, and can be completely unique when compared to competitors. Information is used and produced throughout the value chain of activities and is important for enabling selling to customers in a personalised manner, and for customers to make informed choices when buying. The importance of information to JSE listed banks is crucial for their continued sustainability, and the need to manage information effectively then becomes the foundation for success. Extensive literature was reviewed on information management practices, linking business and technology strategy, and finally linking these to information management through enterprise architecture and effective IT governance. Existing corporate governance principles for effective management of information assets, as stipulated by the King Report on corporate governance, were also reviewed as part of the study. The data-collection method was qualitative in nature and centred on nine unstructured interviews with senior IT and Business Management employees of four JSE listed banks. Results could be triangulated by comparing Information Management literature, Enterprise Architecture literature, and balancing views from both business and IT management perspectives. The data was analysed by identifying important themes in a consistent manner, and then compared to the literature framework to present and discuss the findings, and finally make conclusions and recommendations. JSE listed banks are clear on what their strategy and operating model approach is in interacting with their customers. However, the key requirement to successfully execute these choices is to have accurate information available to be able to have one view of their customers and present one unified organisation to customers. The study finds that this key element is not well executed because of the many architectural challenges each faces. iii At a strategic and IT management level, each of the banks have the know-how to set strategy and design systems and processes to support the chosen strategy. The biggest challenge is the lack of clarity in how business management expresses how processes should function that will allow IT to design systems and data structures allowing effective information creation that is aligned with executing strategy.
The relative persistence in performance of South African Unit Trusts
(2014-01-21) Midgley, Mark
A considerable amount of research has been undertaken in South Africa and internationally to ascertain whether unit trust funds have outperformed their respective benchmarks and if fund managers have been able to achieve persistently superior returns for the investors. This research is aimed at determining whether there is persistence in performance of unit trust funds within South Africa over the periods of June 1988 to January 2013 and investigates the ability of unit trusts to retain their ranks as a winner or loser from one period to the next. Based on a review of available literature on persistence in performance of unit trust funds, two research questions were formulated as part of this study. Firstly, the research aims to determine whether or not persistence in performance exists in South African unit trusts and secondly whether persistence in performance exists in unit trusts relative to a style risk-adjustment benchmark over a period of time. The population tested for this study consists of all the actively managed South African equity funds over a 24-year period. A computer model was used to develop a fund trading strategy for Winner- and Loser-only unit trusts funds, using monthly fund price data sourced from I-Net Bridge. The results of the computer simulation yielded a fund trading strategy which defined the optimum portfolio size, look-back (L) period and holding (H) period to maximise fund performance. The study showed that unit trust funds were able to outperform the benchmark and in most cases were able to outperform the market. In general, winner-only funds tended to outperform loser-only funds. In summary, the research concluded that persistence in performance exists in South African Unit Trusts, and that these funds are able to outperform style riskadjustment benchmark over a period of time.
Investment value of changes in analysts’ consensus-recommendations on JSE Top 40 shares
(2014-01-21) Soni, Vilosha
The aim of this study was to determine whether there was investment value to trading on upgrade and downgrade changes in analysts’ consensus. An event study was undertaken on JSE Top 40 shares to measure the sensitivity of cumulative average abnormal returns (CAARs) to changes in analysts’ consensus for the period 2001 to 2012. A comprehensive literature review was conducted to establish the study approach employed and select the best available methodology to model expected market returns. Limited evidence of the semi-strong form of market efficiency was shown for the JSE, with JSE Top 40 share prices and therefore returns responding quickly to changes in analysts’ consensus upgrades. Changes in analyst consensus downgrades, however, were met with longer post event drift. Short-term trading and profit opportunities could exist, mostly for institutional investors acting on changes in consensus upgrades and downgrades. High transaction costs, however, would leave very few profitable trading opportunities for smaller private investors. Smaller investors should be cautioned against trading on analyst recommendations alone, without paying attention to other signals, as signs of analyst bias (including herding) were found in this sample. Overall the study provides evidence that analysts do add value from the technical and fundamental analysis that they conduct by uncovering valuable, new information to the market, in line with the market efficiency view of Grossman and Stiglitz (1980). This could allow mainly, institutional investors, trading opportunities to earn abnormal returns when considerable changes to analyst consensus on JSE Top 40 companies are made
The Market Value of R&D Investments Made by Companies Listed on the Johannesburg Stock Exchange
(2014-01-20) Hill, Graeme John
It is a prevailing view that South Africa under-invests in innovation. R&D spend is consistently less than 1% of GDP, which is well below benchmarks set by developed countries. The current research is concerned with R&D investments made by the listed business sector. Specifically, the question of whether R&D investments made by JSE listed companies are valued by the market is addressed, and whether these investments are reflected in the share prices. A cross sectional study has been carried out, in order to measure the impact of R&D investments on market value. The research methodology is based on previous studies carried out in developed and developing economies. Following a previous Canadian study, a linear regression model with market value as the dependent variable, and independent variables including book value, abnormal earnings, R&D spend, and net investment, is used. The period chosen for the study is the 5- year period from July 2007 to July 2012. Price data were obtained from the I-Net Bridge database. Data on book value, earnings, R&D spend, and net investment were obtained from financial statements as documented in the McGregor BFA database. This resulted in a panel dataset, for a cross section of companies over the study period. The study was not limited to any specific sector. Only the financial services sector was excluded, due to the specialised nature of valuation methods for such companies. It was found that approximately 60 companies report R&D expenses each year, with an annual spend by JSE companies of approximately R5bn. R&D investment is, however, highly concentrated, with 10 companies accounting for 80% of this spend. The linear regression analysis concludes that R&D spend is an insignificant predictor of market value. The research, therefore, fails to reject the null hypothesis that R&D activity has no impact on market value. The market value of JSE listed companies can be explained to a large degree (R2>90%) by the book value and abnormal earnings variables. This result indicates that short term parameters (book value and current earnings) are the primary drivers of market value on the JSE. While the literature, covering studies in a number of countries, obtains similar results, most do observe a positive effect of R&D on market value. The current result may reflect a short term focus of investors during the volatile period chosen for the study. It is clear, iii however, that innovative activity, on average, plays a very minor role in the fortunes of the listed business sector in South Africa.
Equity Pairs Trading on the JSE Using Single Stock Futures
(2014-01-08) Paine, Sean James
This research report investigates the key factors which contribute to the risks and potential profits of pairs trading. It then expounds on the relationship between these key factors and the success of pairs trading. Although previous research has investigated the success of pairs trading in general, this research delves into how pairs trading may be “fine-tuned” to produce the greatest risk-adjusted returns. It is also the first known study of this nature on the JSE. The problem identified by the research is to define and analyse a hedge fund trading strategy based on the concept of pairs trading using cointegration. This includes determining the key independent variable parameters that are then used to define the pairs trading strategy, and then testing which values are optimal for the key independent variable parameters. Data were collected from a secondary source, a commercial provider of daily stock market data. This was the only source of data for the research. The data were then run through an application which simulated trades based on certain quantifiable conditions. This software was written by the researcher. The key findings of the research are that there are two key independent variables which can be used to influence the success of pairs trading. These variables are the cointegration t-statistic, a measure of how cointegrated a pair of shares are, and the opening trading signal variable. The key message of the research is that by adjusting the two identified variables to suit the risk profile of a fund, it is possible to produce meaningful returns from pairs trading.
THE EFFECTS OF INVESTOR CONFIDENCE ON THE JSE SECURITIES EXCHANGE
(2012-12-04) van der Westhuizen, Cliff
It is widely accepted that behavioural finance plays a role in the way that financial markets are perceived by the investing public. Various behavioural biases have been identified, but it still remains difficult to quantify the actual effect of investor behaviour on the stock market. South Africa is regarded as an emerging economy and market, and therefore world events are accepted as strong indicators of how the South African economy and markets will fluctuate. Many so called leading indicators exist, that are regularly used to predict future stock returns on the South African JSE Securities Exchange (JSE). One reliable indicator that could accurately predict future returns and make many fund managers obsolete, has not yet been found. The purpose of this study was not to identify the best leading indicator for the JSE, but to rather isolate one of the latest indicators established by the Institute of Behavioral Finance. The Sanlam Investment Management Investor Confidence Index (ICI) measures investor confidence by indicating the levels of expected change on the JSE. The ICI indicates expected percentage changes in the level of the JSE - one, three, six and twelve months into the future. The assumption has been that the effects of investor behaviour and the principles of behavioural finance would manifest in the results of the ICI. The results of the ICI are based on the expectations of financial planners and institutions that advise the investing public. Should a significant correlation exist between the ICI and the returns on the JSE, then the results from the ICI may be used as an additional leading indicator to predict future stock returns, based on expectations from the investing public. A low correlation will not necessarily imply that expectations are misaligned; it may be subjective expectations that tend to have a low forecasting power. This study found a small, but significant, correlation between the actual returns one month into the future and the results from the ICI through regression analyses. The one month confidence level can thus be used as an additional predictor of future returns on the JSE. It may prove useful when momentum strategies are employed. The one year indicator from the ICI also showed iii significant correlation. It will be possible to use the results from the ICI as additional input when considering tactical asset allocation changes in the short term. The predicted changes in general showed a tendency from the respondents to underestimate the magnitude of the actual changes on the JSE. In general, when an upward movement was expected, an upward movement did take place. However, the movement on the JSE was normally higher than expected. The same happened with downward movements. An explanation for these conservative expectations can be found in the underlying principles of behavioural finance.

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