Doctoral Degrees (Statistics and Actuarial Science)

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Browsing Doctoral Degrees (Statistics and Actuarial Science) by browse.metadata.advisor "Conradie, Willie"

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    A quantitative analysis of investor over-reaction and under-reaction in the South African Equity Market : a mathematical statistical approach
    (Stellenbosch : Stellenbosch University, 2022-04) Mbonda Tiekwe, Aude Ines; Conradie, Willie; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Statistics and Actuarial Science.
    ENGLISH SUMMARY: One of the basic foundations of traditional finance is the theory underlying the efficient market hypothesis (EMH). The EMH states that stocks are fairly and accurately priced, making it impossible for investors to use stock selection, technical analysis, or market timing to out-perform the market by earning abnormal returns. Several schools of thought have challenged the EMH by presenting empirical evidence of market anomalies, which seems to contradict the EMH. One such school of thought is behavioural finance, which holds that investors over-react and/or under-react over time, driven by their behavioural biases. The Barberis et al. (1998) theory of conservatism and representativeness heuristics is used to explain investor over-reaction and under-reaction. Investors who exhibit conservatism are slow to update their beliefs in response to recent evidence, and thus under-react to information. Under the influence of the representativeness heuristics, investors tend to produce extreme predictions, and over-react, implying that stocks that under-performed in the past tend to out-perform in the future, and vice-versa (Aguiar et al., 2006). In this study, it is investigated whether South African investors tend to overreact and/or under-react over time, driven by their behavioural biases. The 100 shares with the largest market capitalisation at the end of every calendar year from 2006 to 2016 were considered for the study. These shares had sufficient liquidity and depth of coverage by analysts and investors to be considered for a study on behavioural finance. In total, a sample of 163 shares had sufficient financial statement data on the Iress and Bloomberg databases to be included in the study. Analyses were done using two mathematical statistical techniques i.e. the more mathematical Fuzzy C-Means model and the Bayesian model, together with formal statistical tests. The Fuzzy C-Means model is based on the technique of pattern recognition, and uses the well-known fuzzy c-means clustering algorithm. The Bayesian model is based on the classical Bayes’ theorem, which describes a relationship between the probability of an event conditional upon another event. The stocks in the financials-, industrial- and resources sectors were analysed separately. Over-reaction and under-reaction were both detected, and differed across the three sectors. No clear patterns of the two biases investigated were visible over time. The results of the Fuzzy C-Means model analysis revealed that the resources sector shows the most under-reaction. In the Bayesian model, underreaction was observed more than over-reaction in the resources and industrial sectors. In the financial sector, over-reaction was observed more often. The results of this study imply that a momentum and a contrarian investment strategy can lead to over-performance in the South African equity market, but can also generate under-performance in a poorly performing market. Therefore, no trading strategies can be advised based on the results of this study.