The relationship between market-wide investor sentiment and bank returns: Evidence from the JSE

Résumé

This research investigates how the overall mood of investors influences the profits of the major commercial banks traded on the JSE. Although behavioural factors are increasingly acknowledged in financial markets, there is very little empirical evidence that investor sentiment has any impact on the South African banking sector, despite this sector being the main driver of financial stability and economic growth. This study investigated whether investor sentiment has a significant impact on bank stock returns in both the short and long term. The research period ranged from September 2008 to March 2025 and used monthly return data. The paper implements the Autoregressive Distributed Lag (ARDL) approach to illustrate immediate and long-term relationships between sentiment, macroeconomic variables, and bank performance. The findings demonstrate that investor sentiment is one of the significant factors influencing bank stock returns, but the effect varies between different banks. Sentiment, on average, tends to have a negative effect on the majority of banks in the long run, which means that in times of extreme optimistimism are followed by those of overvaluation and subsequent correction. However, one bank revealed a positive return-sentiment relationship which suggests that characteristics unique to a specific bank can have a moderating effect on behavioural factors. The short-run outcomes indicate that bank stock returns are very reactive to changes in sentiment and macroeconomic shocks and at the same time, diagnostic tests for model reliability support these results. The paper contributes to behavioural finance literature by delivering fresh data derived from an emerging market and providing an answer to the problem of bank-level disaggregated analysis that has been neglected. In addition to the theoretical contributions, the results can be turned into actionable insights by investors, policymakers, and portfolio managers who will be reminded of the importance of including sentiment indicators in their bank performance assessment and risk management activities in the South African financial sector.

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