The impact of monetary policy on long-run share price reversals on the Johannesburg Securities Exchange

Abstract

Purpose: The study expands on the phenomenon of long-run reversal in the financial markets using Johannesburg Stock Exchange (JSE) data. This study aimed to determine whether the monetary policy changes implemented by the South African Reserve Bank influence long-run reversals in the JSE. Context: Long-run reversals have occurred in various global financial markets in the US, Europe, Asia, and South Africa. Long-run reversals occur when firms with poor past performance rebound and produce superior returns to firms with good historical past performance. South Africa has a monetary policy of inflation targeting. It tends to increase interest rates whenever the change in the consumer price index falls above the upper limit of the range of 3–6%. Methods: The regressions of the Fama-French three factors model and the 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 influence the long-run reversal. Results: The sample results over the near 15-year sample period show that firms with poor past performance failed to outperform those with past solid performance. In addition, monetary policy changes did not lead to long-run reversals among poor performing firms. The gap is closed under restrictive monetary conditions. Practical value: The study recommends that one could 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.