Monetary, portfolio, policy, price, share, reversal.


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.

Full Text : PDF

  • Anjum, S. (2020). Impact of market anomalies on the stock exchange: A comparative study of KSE and PSX. Future Business Journal, 6(1), 1–11.
  • Arendas, P., Chovancova, B., Kotlebova, J., & Koren, M. (2021). January anomalies on CEE stock markets, Investment Management and Financial Innovations, 18(4), 120–130.
  • Ayaya, O. (2002). Financial liberalisation, savings and investments: Evidence from a cointegration examination (Part 1). South African Association of Accountants Biennial International Conference Proceedings, June 26–28 (pp. 385–401). Port Elizabeth.
  • Bernanke, B. S., & Blinder, A. S. (1988). Credit, money, and aggregate demand (No. w2534). National Bureau of Economic Research.
  • Bjørnland, H. C., & Leitemo, K. (2009). Identifying the interdependence between US monetary policy and the stock market. Journal of Monetary Economics, 56(2), 275–282.
  • Blackburn, D. W., & Cakici, N. (2017). Overreaction and the cross-section of returns: International evidence. Journal of Empirical Finance. 42, 1–14.
  • Banko, J. C., Conover, C. M., & Jensen, G. R. (2006). The relationship between the value effect and industry affiliation. The Journal of Business, 79(5), 2595-2616.
  • Britten, J., Britten, C., & Page, D. (2016). Investigating the interaction between long-term reversal and value on the JSE. Studies in Economics and Econometrics, 40(2), 1–24.
  • Chui, A. C., Subrahmanyam, A., & Titman, S. (2021). Momentum, reversals, and investor clientele (No. w29453). National Bureau of Economic Research.
  • De Bondt, W. F. M., & Thaler, R. H. (1985). Does the stock market overreact? The Journal of Finance, 40(3), 793–805.
  • De Bondt, W. F., & Thaler, R. H. (1987). Further evidence on investor overreaction and stock market seasonality. The Journal of Finance, 42(3), 557–581.
  • Dyl, E. A., Yuksel, H. Z., & Zaynutdinova, G. R. (2019). Price reversals and price continuations following large price movements. Journal of Business Research, 95, 1–12.
  • Fama, E. F., & French, K. R. (1992). The crosssection of expected stock returns. the Journal of Finance, 47(2), 427-465.
  • Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of financial economics, 33(1), 3-56.
  • Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. The Journal of Finance, 51(1), 55–84.
  • Fry, M., Julius, D., Mahadev, L., Roger, S., & Gabriel, S. (2000). Critical issues in the choice of the monetary policy framework. Monetary Policy Frameworks in a Global Context, (2), 3–14.
  • GarciaFeijoo, L., & Jensen, G. R. (2014). The monetary environment and longrun reversals in stock returns. Journal of Financial Research, 37(1), 3–26.
  • George, T. J., & Hwang, C. Y. (2004). The 52week high and momentum investing. The Journal of Finance, 59(5), 2145–2176.
  • George, T. J., & Hwang, C. Y. (2007). Longterm return reversals: overreaction or taxes? The Journal of Finance, 62(6), 2865–2896.
  • Grinblatt, M., & Moskowitz, T. J. (2004). Predicting stock price movements from past returns: The role of consistency and tax-loss selling. Journal of Financial Economics, 71(3), 541-579.
  • Hsieh, H. H., & Hodnett, K. (2011). Tests of the overreaction hypothesis and the timing of mean reversals on the JSE Securities Exchange (JSE): The case of South Africa. Journal of Applied Finance & Banking, 1(1), 107-130
  • Hong, H., & J. Stein. (1999). A unified theory of underreaction, momentum trading and overreaction in asset markets. Journal of Finance, 54, 2143–2184.
  • Miranda-Agrippino, S., & Rey, H. (2020). US monetary policy and the global financial cycle. The Review of Economic Studies, 87(6), 2754–2776.
  • Muller, C. (1999). Investor overreaction on the Johannesburg Stock Exchange. Investment Analysts Journal, 28(49), 5–17.
  • Odada, J. E., Ayaya, O., & Mumangeni, J. (2000). Causes of inflation in Namibia: An empirical exploration. University of Namibia.
  • Page, D., Britten, J., & Britten, C. J. (2013). Momentum and liquidity on the Johannesburg Stock Exchange. International Journal of Economics and Finance Studies, 5(1), 56–73.
  • Page, M. J., & Way, C. V. (1992). Stock market over-reaction: The South African evidence. Investment Analysts Journal, 21(36), 35–49.
  • Rif, A., & Utz, S. (2021). Short-term stock price reversals after extreme downward price movements. The Quarterly Review of Economics and Finance, 81, 123–133.
  • Statista. (2020, 27 August). South Africa’s inflation rate from 1984 to 2021. Retrieved from
  • Trade Economics. (2020, 27 August). South Africa interest rate. Retrieved from
  • US Federal Reserve. (2020, 15 August). Historical approaches to monetary policy. Retrieved from
  • Zaremba, A. (2016). Has the long-term reversal reversed? Evidence from country equity indices. Romanian Journal of Economic Forecasting, 19(1), 88–103.