The Effects of Investor Sentiment on Stock Return Indices Under Changing Market Conditions: Evidence from South Africa

Fabian Moodley (), Sune Ferreira-Schenk and Kago Matlhaku
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Fabian Moodley: School of Economic Science, North-West University, Gauteng 1174, South Africa
Sune Ferreira-Schenk: School of Economic Science, North-West University, Gauteng 1174, South Africa
Kago Matlhaku: School of Economic Science, North-West University, Gauteng 1174, South Africa

IJFS, 2025, vol. 13, issue 2, 1-24

Abstract: The objective of the study is to examine the effects of investor sentiment on the Johannesburg Stock Exchange (JSE) index returns in bull and bear market conditions. Accordingly, this study uses monthly data to construct a new market-wide investor sentiment index and test its effects on the JSE aggregated and disaggregated index returns in alternating market conditions for the period March 2007 to January 2024. The findings of the Markov regime-switching model reveal that when the JSE is in a bull market condition, the JSE oil and gas sector returns and the JSE telecommunication sector returns are affected positively by investor sentiment. Similarly, in a bearish state, the JSE health sector returns and JSE telecommunication sector returns are negatively affected by investor sentiment. Collectively, the findings suggest that the effects of investor sentiment on JSE index returns are regime-specific and time-varying, such that they are dependent on the market conditions (bull or bear) and the type of JSE index (aggregated or disaggregated index). Accordingly, investors must consider this information to ensure resilient investment decisions and risk management strategies in sentiment-induced markets and alternating market conditions.

Keywords: stock market returns; market conditions; investor sentiment; principal component analysis (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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