The impact of investor sentiment on sectoral returns and volatility: Evidence from the Johannesburg stock exchange

Abstract

This study investigated the impact of investor sentiment impact on sectoral returns and their volatility on the Johannesburg Stock Exchange using a proxy-based composite investor sentiment index and generalised autoregressive conditional heteroscedasticity models. Overall, findings showed a negative relationship between prevailing sentiment and subsequent returns and a positive relationship between investor sentiment and sector returns volatilities. Additionally, there was evidence of variability of sentiment effects on the sector returns and volatilities. Accordingly, firms that raise financing through the stock market, portfolio managers with investments thereon and policymakers seeking to ensure that markets operate efficiently need to consider the impact of market-wide investor sentiment on volatility and returns.

Keywords:

• sentiment
• returns
• volatility
• GARCH
• South Africa

Jel classification:

• G10
• G15
• G17
• G40
• G41

Public interest statement

In this study, the authors sought to ascertain whether investor sentiment, an amalgam of investors’ various behavioural biases, has any explanatory power on the returns and volatility of different sector indices from the South African market. As there is no universally accepted measure of investor sentiment, the authors constructed a composite index using various proxies shown to be indicative of prevailing investor sentiment in literature. For the method of analysis, the generalised autoregressive conditional heteroscedasticity (GARCH) models were used due to their popularity in modelling stock market volatility. The results indicated that investor sentiment does have a degree of explanatory power on the returns and volatilities of the sector indices. However, the impact seems to be sector-dependent. These findings have implications for investors, firms and policymakers.

Disclosure statement

The authors have o potential conflict of interest to declare.

Additional information

Notes on contributors

Hilary Tinotenda Muguto

Hilary Tinotenda Muguto is a PhD candidate in the School of Accounting, Economics and Finance, at the University of KwaZulu-Natal. His research interests include healthcare equity and finance, financial markets, behavioural finance, investment analysis and development economics.

Lorraine Muguto (PhD) is a Finance postdoctoral fellow in the School of Accounting, Economics and Finance, University of KwaZulu-Natal, South Africa. Her research interests include volatility modelling, financial markets, behavioural finance and financial risk.

Lorraine Muguto

Lorraine Muguto (PhD) is a Finance postdoctoral fellow in the School of Accounting, Economics and Finance, University of KwaZulu-Natal, South Africa. Her research interests include volatility modelling, financial markets, behavioural finance and financial risk.

Azra Bhayat

Azra Bhayat is a postgraduate student in the School of Accounting, Economics and Finance at the University of KwaZulu-Natal. Her research interests include behavioural finance, financial risk and financial markets.

Hawaa Ncalane

Hawaa Ncalane is a Finance postgraduate student at the University of KwaZulu-Natal. Her research interests include investor sentiment and financial markets.

Kara Jasmine Jack

Kara Jasmine Jack is a Finance postgraduate student at the University of KwaZulu-Natal. Her research interests include volatility modelling and financial markets.

Saadia Abdullah

Saadia Abdullah is a Finance postgraduate student at the University of KwaZulu-Natal. Her research interests include volatility modelling and financial markets.

Thabile Siphesihle Nkosi

Thabile Siphesihle Nkosi is a Finance postgraduate student at the University of KwaZulu-Natal. Her research interests include investor sentiment and financial markets.

Paul-Francois Muzindutsi

Paul-Francois Muzindutsi (PhD) is a Professor of Finance in the School of Accounting, Economics and Finance, University of KwaZulu-Natal. His research interests include financial markets, behavioural finance, financial risk management, investment portfolios and time series analysis of macroeconomic variables.