Monetary policy and long-run share price reversals on the Johannesburg Securities Exchange

Abstract

Purpose: The study expounds on the phenomenon of long-run reversal and monetary policy in the financial markets. The study used Johannesburg Securities Exchange (JSE) data to determine whether the monetary policy changes implemented by the South African Reserve Bank impact long-run reversals in the JSE. Context: Long-run share value reversals have occurred in various regional financial markets in the US, Europe, Asia, and South Africa. Long-run share value reversals occur when firms with poor past performance rebound and produce superior returns compared to firms with good historical past performance. South Africa has a monetary policy of inflation targeting, leading to upward lending rate adjustments whenever consumer inflation threatens to exceed 6%. Methods: The regressions of the Fama-French three factors model and Fama-MacBeth model were used to estimate the relationship between the excess return of different portfolio returns and the Fama-French three factors. Furthermore, we split our sample under expansive and restrictive monetary conditions. We ran the regression of the Fama-MacBeth model again to see whether the monetary conditions will influence the long-run share price reversal. Results: The sample results over the near 15-year sample period showed that firms with poor past performance failed to outperform those with past solid performance. The gap is closed under restrictive monetary conditions that tighten the liquidity conditions of an economy. In addition, monetary policy changes led to long-run reversals among poor performing firms. Practical value: The study contributes to momentum theory. It is recommended that further research do a detailed examination of the relationship between firm characteristics and long-run reversals under various monetary conditions. Monetary conditions are worth watching for when constituting a portfolio because they create arbitrage opportunities for astute investors.