Testing for the Johannesburg stock exchange as an efficient market : contrarian investment strategies and mean reversion on the JSE

Master Thesis


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University of Cape Town

The objective of the discussions and tests presented in this dissertation is to test the JSE as an efficient market. The statistical tests will be undertaken with the aim of observing trends in returns to investments on the JSE, whilst investment strategies that are based on assumptions contrary to those of the EMH will be created and their returns observed. The presence of observable patterns in returns and the ability of investment strategies to consistently earn excess positive returns have both been interpreted as providing evidence against the EMH. Thus, the results achieved in the present studies will be interpreted within a similar context. Evidence of price movements and returns behaviour that are contrary to those expected in an efficient markets would render one of the central assumptions of the CAPM questionable and one of the most widely used asset pricing models would be rendered ineffective. A further consequence of any conflicting results is that the theory of rational investors and their immediate reaction to new pertinent information will be refuted. The absence of rational decision makers would imply that current publicly available information does have value in terms of investment strategies, unlike in an efficient markets The above mentioned efficient markets tests will be applied to the JSE so as to observe whether pricing errors do occur and whether these errors are sufficient to conclude that the JSE is not an efficient market.

Bibliography: leaves 133-138.