A quantitative analysis of investor over-reaction and under-reaction in the South African Equity Market : a mathematical statistical approach

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dc.contributor.advisorConradie, Willieen_ZA
dc.contributor.authorMbonda Tiekwe, Aude Inesen_ZA
dc.contributor.otherStellenbosch University. Faculty of Economic and Management Sciences. Dept. of Statistics and Actuarial Science.en_ZA
dc.date.accessioned2022-02-26T06:35:07Z
dc.date.accessioned2022-04-29T09:39:50Z
dc.date.available2022-02-26T06:35:07Z
dc.date.available2022-04-29T09:39:50Z
dc.date.issued2022-04
dc.descriptionThesis (PhD)--Stellenbosch University, 2022.en_ZA
dc.description.abstractENGLISH 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.en_ZA
dc.description.abstractAFRIKAANSE OPSOMMING: Een van die basiese boustene van tradisionele finansies is die teorie van die effektiewe markhipotese (EMH). Die EMH verklaar dat aandele billik en akkuraat geprys word, wat dit vir beleggers onmoontlik maak om aandeleseleksie, tegniese ontleding of marktydsberekening te gebruik om die mark te oortref deur abnormale opbrengste te verdien. Die EMH is en word uitgedaag deur verskeie denkrigtings wat deur empiriese navorsing ondersteun word en wat die EMH weespreek. Een van die denkrigtings is gedragsfinansies, wat aandui dat beleggers oor tyd oorreageer en/of onderreageer, gedryf deur hul gedragsvooroordele. Barberis et al. (1998) se teorie oor die konserwatiewe en verteenwoordige heuristiek word gebruik om beleggers se oorreaksie en onderreaksie te verklaar. Beleggers wat konserwatief word, is traag om hul oortuigings aan te pas in reaksie op onlangse getuienis, en reageer dus nie op inligting nie. Onder die invloed van die verteenwoordige heuristiek, is beleggers geneig om ekstreme voorspellings te maak en oor te reageer, wat beteken dat aandele wat in die verlede onderpresteer het, in die toekoms beter presteer en omgekeerd (Aguiar et al., 2006). In hierdie studie word ondersoek of Suid-Afrikaanse beleggers geneig is om oor tyd te oorreageer / of onderreageer, gedryf deur hul gedragsvooroordele. Die100 aandele met die grootste markkapitalisasie aan die einde van elke kalenderjaar vanaf 2000 tot 2016 is in hierdie studie gebruik. Hierdie aandele het genoegsame likiditeit en diepte van dekking deur analiste en beleggers gehad om oorweeg te word vir ‘n studie oor gedragsfinansies. ‘n Steekproef van 163 aandele in totaal het genoegsame finansiële-staat-data in die Iress en Bloomberg databasisse gehad sodat dit ingesluit kon word in die studie. Die analise is gedoen met behulp van twee wiskundige statistiese tegnieke: die meer wiskundige Fuzzy C-Means (FCM) model en die Bayesiaanse model, tesame met formele statistiese toetse. Die FCM model is gebaseer op die tegniek van patroonherkenning en gebruik die bekende fuzzy gemiddelde tros algoritme. Die Bayesiaanse model is gebaseer op die klassieke Bayes-stelling wat ’n verband beskryf tussen die waarskynlikheid van ’n gebeurtenis gegewe ’n ander gebeurtenis. Die aandele in die finansiële, nywerheid en hulpbronne sektore is afsonderlik ontleed. Beide oorreaksie en onderreaksie is gevind, en het verskil tussen die drie sektore. Geen duidelike patrone van die twee vooroordele was sigbaar nie. Die FCMontleding het aan die lig gebring dat die hulpbronsektor die meeste onderreaksie toon. Met die Bayesiaanse model is onderreaksie meer waargeneem as oorreaksie behalwe in die finansiële sektor. Die resultate van hierdie studie impliseer dat momentum en ‘n teenstrydige beleggingstrategie kan lei tot oorprestasie in die Suid-Afrikaanse aandelemark, maar dit kan ook onderprestasie in ‘n swak presterende mark te weeg bring. Daarom kan geen handelstrategieë op grond van die resultate van hierdie studie aanbeveel word nie.af_ZA
dc.description.versionDoctoral
dc.format.extentxviii, 174 pages : illustrations, includes annexures
dc.identifier.urihttp://hdl.handle.net/10019.1/124895
dc.language.isoen_ZAen_ZA
dc.publisherStellenbosch : Stellenbosch University
dc.rights.holderStellenbosch University
dc.subjectStatistical methodsen_ZA
dc.subjectMathematical modelsen_ZA
dc.subjectMathematical analysisen_ZA
dc.subjectUCTD
dc.titleA quantitative analysis of investor over-reaction and under-reaction in the South African Equity Market : a mathematical statistical approachen_ZA
dc.typeThesisen_ZA
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Doctoral Degrees (Statistics and Actuarial Science)