THE EFFECTS OF INVESTOR CONFIDENCE ON THE JSE SECURITIES EXCHANGE
Date
2012-12-04
Authors
van der Westhuizen, Cliff
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Abstract
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
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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.
Description
MBA thesis - WBS
Keywords
Investor confidence, Johannesburg Securities Exchange