Abstract
Background: There are various studies that confirm the efficiency of the Johannesburg Stock Exchange (JSE), implying that there are no opportunities for active portfolio managers to earn excess returns over the long run.Aim: The aim of the research is to prove that the sub-indices on the JSE go through cycles of efficiency and inefficiency even though the JSE as a whole might be considered informationally efficient.Setting: Although the JSE as a whole can be considered to be weak-form efficient, portfolio managers are not bound to investing in large liquid stocks alone. Many aggressive funds allow managers to also allocate a portion of their portfolio to smaller stocks. This has implications when considering the efficiency of the stocks being selected.Methods: Given the impact efficiency has on portfolio selection, we test for the adaptive market hypothesis using a representative sample of stock indices by means of the automatic variance ratio test, the Chow–Denning joint variance ratio and the joint sign test on the JSE.Results: Our results confirm that some of the smaller, and in some instances younger, indices are not always as efficient as the all share index, thus allowing portfolio managers with an active management approach some opportunities to profit from informational inefficiencies in the market.Conclusion: The practice of active management by portfolio managers in the South African market seems to defy logic if one considers the fact that the JSE as a whole is at the very least weak-form efficient. By proving that some of the sub-indices that make up the all share index are inefficient most of the time, this article shows that the phenomenon of active portfolio managers is less of a surprise.
Highlights
IntroductionThe first major test to this effect was performed by Bachelier (1900) when studying the mathematical theory of random processes
Testing for market efficiency is an age-old quest
The first window started on 03 July 1995 and ended on 02 July 1997, and holding periods of 2, 5, 10, 20 and 40 are used for all the tests
Summary
The first major test to this effect was performed by Bachelier (1900) when studying the mathematical theory of random processes He speculated that the movement of stock prices followed a Brownian motion and are, by implication, unpredictable. As formalised by Eugene Fama’s seminal paper on efficient capital markets in 1970, is generally used to refer to informational efficiency Under this hypothesis, markets are generally believed to act as effective clearing places that quickly and correctly reflect current security prices. The most prominent of these behavioural finance anomalies are: the seasonality in stock returns, the existence of dividend yields and earnings yields in stock returns, the impact of macroeconomic factors on stock returns, the presence of autocorrelation in stock returns and size-related anomalies Each of these anomalies has been documented in detail and comprises several hundred papers on each anomaly. There are various studies that confirm the efficiency of the Johannesburg Stock Exchange (JSE), implying that there are no opportunities for active portfolio managers to earn excess returns over the long run
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