Investor Sentiment in the South African Stock Market

Abstract

This study examines the relationship between investor sentiment and individual stock returns on the Johannesburg Stock Exchange (JSE) over the period 2000 to 2024. Using a sentiment index constructed from local market-based proxies, the analysis explores whether investor sentiment predicts future returns beyond the explanatory power of the Fama-French three-factor model. Two key hypotheses are tested: first, that investor sentiment has a statistically significant negative relationship with future stock returns; and second, that this effect is more pronounced for stocks that are difficult to value or arbitrage. The empirical methodology includes time-series and cross- sectional regressions, with robustness checks. The results provide evidence supporting both hypotheses, highlighting the relevance of behavioural factors in asset pricing on the JSE. This research contributes to the emerging market behavioural finance literature and offers insights for investors and portfolio managers seeking to better understand sentiment-driven mispricing and improve risk-adjusted returns.