Abstract
Stock market bubbles have been a recurring phenomenon in financial markets, with potentially devastating consequences for both local and global economies. This dissertation investigates the relationship between investor sentiments and stock market bubbles by comparing two significant financial markets: the S&P 500 in the United States (U.S.) and the Johannesburg Stock Exchange (JSE) in South Africa (SA). This study aims to examine how U.S. investor sentiment can influence stock market behaviour in SA.
The study examines sentiment indicators and historic data with the aim of clarifying the complex relationship between investor sentiments and stock market bubbles. This dissertation focuses on investor sentiment as a predictor of stock market bubbles. Most studies focus on developed nations, and they do not highlight the impact that U.S. investor sentiment has in developed nations compared to developing nations.
This study makes use of the sup Augmented Dickey- Fuller (SADF) test and the generalised sup Augmented Dickey- Fuller (GSADF) test, to identify and date bubbles. Thus, allowing for the observation of the nexus between sentiments and stock bubbles, during the identified stock bubbles. This dissertation then employs a logistic regression model to investigate the probability that stock market bubbles are influenced by investor sentiment. This dissertation makes use of the consumer confidence index (CCI) to provide a proxy for investor sentiment. The CCI of the U.S. is obtained from Fred and performed by the University of Michigan. The consumer confidence survey that was conducted by the University of Michigan commenced in 1946. The JSE was collected from Yahoo Finance. The S&P500 was collected from Federal Reserve Economic Data (FRED) as well as the interest rates and economic growth for both the U.S. and SA.
This analysis shows that U.S. sentiments have a significant influence on the probability of bubble occurrence in both countries, interestingly the positive effect is statistically significant only to the SA market. Elevated optimism and exuberance can drive asset prices to unsustainable levels. This study indicates that the underlying psychological factors that drive investor sentiment and speculative bubbles are consistent across borders despite geographic, cultural, and economic differences.
The study further examines the interrelation of financial markets in a globalised world. The U.S. is known as a prominent player globally; therefore, economic events, policy changes, and financial
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developments in the U.S. have the ability to spread rapidly through global markets. This can then influence sentiment and investment decisions in SA. The study shows the challenges and opportunities this interrelation presents for market participants and policymakers. Understanding the connection between investor sentiments and -stock market bubbles, and the impact that the U.S. has on SA, is vital for investors, policymakers, and financial professionals. It assists in developing strategies to capitalise on investment opportunities and to manage risk effectively. Ultimately, this research contributes to a comprehensive understanding of the global financial system and informs strategies for achieving stability in the face of economic interdependencies.
Key Words: Investor sentiment, Stock market bubbles, GSADF, CCI
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