Short-term return reversion on the JSE

This study explores the existence of mean reversion in returns on the Johannesburg Stock Exchange (JSE). Finding that most research on the JSE applies to the long term, this paper investigates mean reversion across relatively shorter periods. Thus investment horizons between 1 and 30 days are considered. This paper finds that the standard short-term reversal strategy can be improved upon by a double application of the strategy. Furthermore, return reversal are found to be strongest when comparing prior 5 day returns with future 5 day returns. The best strategy is found to be the double application of the standard short-term reversal strategy using the 10th percentile of the 5 day prior returns and the 10th percentile of the 10 day prior returns. The long positions of this strategy still generated attractive returns over the market crash of 2008, making this a robust strategy. In general, long strategies outperform short strategies. However, over the crash period of 1 August 2008 to 1 April 2009 the short strategies offered more attractive returns and higher information ratios. Other additions to the strategy, such as moving average and kicker rules, fail to add value or reduce risk. Extending the holding period of the standard short-term reversal strategy generally results in poorer performance across all percentiles. The results in this paper pertain to the top 60 shares on the Johannesburg Stock Exchange ranked by market capitalisation on 10 August 2012. These cover a sample period ranging from 1 January 1998 to 10 August 2012. The analysis presented in this paper does not factor in the influence of trading costs. Such costs may be significant when portfolios are closed and opened frequently. An additional caveat is that many strategies lead to a small average number of positions, which is problematic for institutional traders.

Grantor dc:publisher.institution

Department of Finance and Tax

Year dc:date.issued

2013

Author dc:creator

• Garisch, Jarryd

Advisor dc:contributor.advisor

• Van Rensburg, Paul

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/12331

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/12331