Browsing by Author "Peerbhai, Faeezah."

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The effect of inclusions and exclusions of stocks from the JSE Top 40 and FTSE/JSE mid cap indices on liquidity.
(2022) Naicker, Milanca.; Peerbhai, Faeezah.
The inclusion and deletions of stock from the equity indices provide an important insight into a company’s performance. There is evidence there are no studies on the effects of inclusions and exclusions of liquidity in a South African market as previous studies in such a market relates to price and index rebalancing effects as a result of inclusions and exclusions to the FTSE/JSE and JSE Top 40. The insights that international studies provide are useful and these effects explored in a South African context would be useful and close the gap in this area of research and this is one of the main aims of the study. The lack of studies analysing the impact on liquidity as a result of inclusions and exclusions to the JSE Top 40 and Mid Cap Index is a disadvantage to South African investors, companies, and regulators. Therefore, the primary objective of this study is to investigate the effect of inclusions and exclusions on the Top 40 and Mid Cap Index on liquidity as well as to determine how does the size of a firm impacts the liquidity effects of an index addition or deletion. The paper seeks to determine these effects by using an event study methodology by regressing a number of different liquidity proxies (turnover, aggregate turnover, bid-ask spread, percentage spread and Amihud Illiquidity measure) using daily data for the companies that have been included and excluded from the indices. This study analyses 44 inclusions and exclusions on the JSE Top 40 and 73 and 81 inclusions and exclusions on the Mid Cap index from January 2010 to December 2020. The results from this study provide important insights into the effects of index revisions and firm size on liquidity. For stocks that form part of the inclusions to an index, there in an increase in liquidity as a result of the increased trade after the stock was included in the Top 40 and provides support from the Downward Sloping Demand Curve Hypothesis, Price Pressure Hypothesis and Liquidity Cost Hypothesis. For exclusions stocks, shows a decrease in volume traded and increasing spreads for the Top 40 and indicates that this diminished liquidity observed for such companies that find themselves excluded in both the Top 40 and Mid Cap indices which supports the information cost liquidity hypothesis.
The impact of exchange traded funds on the microstructure of their constituent shares: a South African case.
(2020) Peerbhai, Faeezah.; Muzindutsi, Paul-Francois.
The creation of the Exchange Traded Fund (ETF) has revolutionised the global asset management industry since its inception three decades ago, with the result that this investment product has propelled passively managed products to the forefront of the financial market. Whilst the superficial benefits and costs to this product are often debated, the potential impact of these investment assets on the microstructure elements of the financial market, and thus its overall impact on market stability, is less well known. The necessity for a greater understanding of the potential positive or detrimental impacts of this asset class on market operation has been the driving force in recent international developments in this field. This study therefore aims to fill this gap in the literature, by evaluating the impact of ETF-related market activities, on the microstructure elements of information efficiency, and liquidity of the South African equity market. The analysis of liquidity aims to evaluate the influence of ETF introduction on the relative liquidity of its underlying assets. The sample therefore consists of 147 JSE-listed firms which are the constituents to the 23 JSE-listed, domestic equity ETFs that were listed between 2006 and 2019. In contrast, the informational efficiency analysis attempted to examine the impact of ETF ownership and trade, on the efficiency of its underlying constituents, and this analysis therefore makes use of 94 underlying JSE-listed firms, which are included in a sample of both domestic and international ETF between the periods of 2009 to 2019. The research methods made use of the event study approach, fixed effect panel data estimations, and the Generalised Method of Moments (GMM) estimation method. The results produced largely find support for Merton’s (1987) hypothesis, that the inclusion of a company into the ETF, increases investor awareness, which thus facilitates further informed trading in the underlying asset. This is evidenced by findings of improved liquidity and information efficiency in the underlying constituents to the ETFs surveyed, with the smaller, less well-known companies in the analysis enjoying the benefits of ETF membership more. The study therefore concludes that the evidence of improved market function and stability due to ETFs, is beneficial for investors who usually face adverse portfolio effects due to the high concentration of large firms on the JSE. Therefore regulators should actively encourage growth in this market by relaxing current pension fund regulations, and revising the taxation environment for ETFs to allow this asset class to become more competitive relative to the actively managed fund industry in South Africa. Keywords: Exchange Traded Funds, South Africa, liquidity, information efficiency, synchronicity, JSE.
The international capital asset pricing model : empirical evidence for South Africa.
(2011) Peerbhai, Faeezah.; Strydom, Barry Stephen.
An integral component of all corporations‘ financial operations is the determination of the cost of equity of the firm. This input is required in many financial decision making processes, and the correct estimation of this value is therefore a very important issue. The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) has filled this gap since its inception, and has been extensively used by both corporations and individuals in their estimation of expected return. Whilst the standard form of this model is intuitive and simple in its implementation, an additional issue faced when utilising it in the current day is that of global financial integration. Whilst the CAPM is suitable for use in a market which is completely segmented from the rest of the world, this is often not the case as the barriers across countries have gradually declined, with the result that much of the world is now internationally integrated. This therefore led to two extensions of the CAPM to the international environment by both Solnik (1974) and Grauer, Litzenberger and Stehle (1976). Whilst both are referred to as International CAPM (ICAPM) models, the difference lies in that Solnik‘s (1974) model incorporates the presence of exchange rate risk, whilst the Grauer, Litzenberger and Stehle (1976) one does not. This study therefore provides an analysis of the suitability of these two models to the South African environment, along with a comparison of the relative performances of each model against that of the standard CAPM model. The three different methods of analysis used are: the unconditional approach, a conditional GARCH approach, as well as the cost of equity approach. The analyses are applied to the data which consists of all listed firms on the JSE from 1990 up to 2010, with multiple methods of evaluation employed, such as information criteria and forecasting, in order to provide a robust analysis of all three models. The results of the analysis vary across the different methods used, however since a significant amount of evidence was found of the International CAPM models, it can be concluded that an international asset pricing model should be used instead of a domestic one. In the choice between the single-factor ICAPM model and the multifactor ICAPMEX, even though use of the Grauer et al (1976) model would not be inappropriate, it was concluded that use of Solnik‘s (1974) ICAPMEX model would be the best suited to the South African financial environment, as the presence of exchange rate risk factors in an asset pricing model is found to be an important inclusion which may lead to better cost of equity estimates.
Investor overconfidence in the South African exchange traded fund market.
(2020) Kunjal, Damien.; Peerbhai, Faeezah.
In recent years, Exchange Traded Funds (ETFs) have transformed the investment management landscape. Despite the soaring popularity of ETFs, ETF traders may not always be rational. Mispricing of securities, excess trading volume, and excess return volatility present in financial markets can be attributed to the influence of the overconfidence bias. Several existing studies have explored the overconfidence bias in stocks markets, however, studies on investor overconfidence in ETF markets remain scanty. Therefore, the objective of this study is to investigate the presence of investor overconfidence in the South African ETF market. Vector Autoregressive (VAR) models are employed to examine the lead-lag relationship between market turnover and market return for the market of South African ETFs tracking domestic benchmarks and for the market of South African ETFs tracking international benchmarks from the inception of the first ETF till August 2019. Consistent with the overconfidence hypothesis, a positive and significant relationship between current market turnover and lagged market returns is found for both markets, even after controlling or market volatility and cross-sectional return dispersion. This relationship holds for both market and individual ETF turnover indicating that the overconfidence bias also influences the trading activities of individual ETFs in both markets. Additionally, using Exponential Generalised Autoregressive Conditional Heteroskedasticity (EGARCH) models, this study reports that overconfident trading exhibits a significant positive effect on the volatility of market return over the full sample periods. Notably, the sub-period analysis reveals that, there is a significant positive relationship between overconfident trading and market return volatility before and during the 2008 global financial crisis only in the market of ETFs tracking domestic benchmarks. However, for the post-crisis subsample, the positive effect of overconfident trading on market volatility is only significant for the market of ETFs tracking international benchmarks. These findings have important implications for ETF investors and traders who trade in the South African ETF market; investment management companies that guide investment decisions; as well as policymakers and regulators who are responsible for promoting the efficiency of the South African ETF market.
Measuring the impact of Covid-19 on banking sector returns, profitability, and liquidity in South Africa.
(2022) Naidoo, Dashami.; Peerbhai, Faeezah.; Kunjal, Damien.
Abstract available in PDF.
The performance evaluation and style analysis of socially responsible investment funds in South Africa.
(2019) Naidoo, Jeremy Ebenezer.; Peerbhai, Faeezah.
Socially Responsible Investing (SRI) has been widely acknowledged as an integral part of modern-day investment practice, gaining significant growth since its early history. While SRI consciousness has grown steadily in South Africa; there is a paucity of research on the effect of its restrictions on investor’s portfolios. Considering the limited studies documented, the extant research delves into the profile of the South African responsible investing industry, highlighting its vast development and investment strategies. To assess the viability of socially responsible investments and provide investors with the ability to make more informed decisions, scholars in finance have raised pertinent questions, primarily focused on the impact of utilising environmental, social and governance (ESG) criteria on socially responsible investment performance. As such, this study aimed to explore this research domain and position its results within the currently inconclusive literature. The objective of the study was to evaluate active SRI in South Africa, with a focus exclusively on SRI funds. The approach followed was twofold. Firstly, by employing the Fama and French 3-factor model and Carhart 4-factor model, the study assessed the risk-adjusted performance of SRI funds relative to their conventional counterparts (conventional funds and passive benchmarks) over two evaluation periods (2009-2013 and 2014-2018). The findings showed that after significant underperformance of SRI funds in the earlier period, they tend to perform better in the latter period. The improvement in performance over the study was termed a ‘learning effect’ - the older funds have finally caught up with conventional funds (or outperformed them) while funds that were launched recently still trail their conventional peers. Furthermore, the models showed similar findings for the market loading, size (SMB) and value (HML) factors – SRI funds exhibited a lower sensitivity to market fluctuations as compared to non-SRI funds, a higher exposure to small-cap stocks, and exhibited a larger exposure to growth stocks in the earlier period (2009-2013) while a greater exposure to value stocks in the latter period (2014-2018). The second research aim of the study made use of Return-Based Style Analysis (RBSA) to identify and compare the determinants of SRI funds to non-SRI funds (conventional funds). To date, this method has not been previously applied to SRI funds in South Africa. The findings of the RBSA model showed that SRI funds, on average, exhibited moderate to high levels of active management, which were also found to be substantially higher than non-SRI funds. This indicated that the imposition of additional constraints by SRI funds (through SRI criteria) does not hinder the fund manager from adding value through active management. Furthermore, the classifications of SRI funds were shown, on average, to comply with their investment mandates and relevant regulation, i.e. correctly classified. Taking into account the asset class exposures of SRI funds, the regression results showed that these exposures were found, on average, to almost mirror the exposures of the funds’ actual asset holdings. With respect to the comparative style analysis of SRI and non-SRI funds, a distinguishable asset class exposure was shown whereby SRI funds were found to have a value-tilt while non-SRI funds exhibited a growth-tilt over the evaluation period.
The impact of COVID-19 on the South African stock market: a sectoral-level analysis.
(2024) Ramterath, Akshay Saish.; Peerbhai, Faeezah.
The novel 2019 Coronavirus (COVID-19) quickly spread all over the world. It dramatically affected the financial markets in almost every country, creating substantial uncertainty permeating every aspect of life and business. Investors and markets are facing a high degree of volatility regarding the physical and financial impacts of the virus. Behavioural Finance studies are steadily emerging, highlighting the impact of investors' emotions on their investment decisions in stock markets during macroeconomic events. Existing research of the pandemics impact on volatility and/or stock returns have predominantly focused on the overall performance of the South African stock market with limited evidence on the industry specific impact. This study therefore aims to analyse the impact of COVID-19 on the 8 largest industry sectors of the Johannesburg Stock Exchange (JSE). In particular, the study attempts to evaluate the impact of COVID-19 on industry performance, stock returns, trading volume, stock volatility and COVID-related investor sentiment. These research objectives are analysed using a variety of different methodologies, such as an event study, and GARCH (1,1) model. With existing global studies indicating a rise in the importance of industry specific factors which aid in the pricing of equities, a study of this sort is imperative to the South African investor. The sample in this study consists of daily data from the 8 largest sectors on the JSE and spans the period 1 January 2017 – 30 August 2022. The selected period ensured to include stock market performance before the COVID-19 outbreak, allowing a more accurate comparison of industry performance. The results of this study suggest that the COVID-19 pandemic had a significant impact on all sectors of the JSE included in this paper, both in the short-term and long-term. Some sectors gained from the impact of the pandemic and others suffered - with the number of the sectors negatively impacted outweighing the number of sectors positively impacted. Furthermore, the findings of this study suggest significant implications for investors and policymakers. For investors, it is suggested that they be cognisant of how industry sector idiosyncrasies affect company performance during crises. Investors who seek a healthy return on their investment should avoid investing in sectors that are more vulnerable in times of crisis and negatively impacted by the COVID-19 pandemic. However, risk-seeking investors may opt to invest in higher-risk sectors since these stocks may generate higher returns due to an increased market risk premium. For policymakers, the findings of this study indicate that the implementation of strict lockdowns in times of crisis be carefully implemented as many sectors were not able to recover from the implications brought on by this policy, crippling further operation of many companies. Regulators should be cautious of the effect of such policies on industries and the economy as a whole. Policymakers must customise such policies based on the characteristics or nature of each market sector.