Inaugural Lecture Explores the Role of Investor’s Sentiment in Emerging Financial Markets Behaviour

Professor Paul-Francois Muzindutsi
Professor Paul-Francois Muzindutsi

A recent inaugural lecture delivered by Professor Paul-Francois Muzindutsi from the Discipline of Finance within the School of Accounting, Economics and Finance (SAEF) in the College of Law and Management (CLMS), aimed to emphasise the importance of understanding investors sentiments in a fast-paced world of financial markets.

Muzindutsi is also a member of the National Research Foundation (NRF) rating and evaluation standing committee, a fellow member of the Pan-African Scientific Research Council (PASRC), and a founding and executive member of UKZN’s Business Rescue Unit (BRU).

Titled: Role of Investor Sentiment in Explaining Emerging Financial Markets Behaviour, his presentation based on research he carried out, highlighted the influence of investor sentiment on various financial assets, including stocks, housing, and foreign financial flows and how it affects both emerging and developed markets.

‘We constructed a sentiment composite index and tested its effect on financial flows and the performance of equity and property markets. Investor sentiment has a significant effect on the South African equity and property markets,’ said Muzindutsi.

He also placed emphasis on the development and validation of a market-wide sentiment index, a crucial tool to gauge the prevailing sentiment in financial markets. He explained that there are varying views on whether markets are efficient or inefficient due to the influence of investors’ emotions and sentiments. On one hand, Efficient Market Hypothesis (EMH) posits that markets are entirely efficient and that all information is reflected in stock prices. On the other hand, Behavioural Finance suggests that investors are not always rational, and their investment decisions can be influenced by psychological and emotional factors. He also acknowledged the role of the Adaptive Market Hypothesis (AMH) in reconciling the EMH and Behavioural Finance views.

‘We found a significant relationship between market-wide investor’s sentiment and stock return volatility in both developed and developing markets; such connectedness is sector-dependent. In the property market, investor’s sentiment exerts regime-dependent influences on the prices of small and medium segments of the property market but does not affect the large property market segment. Our findings emphasise that volatility and asset pricing models should be augmented with a sentiment factor.’

His lecture contributed to the need for further research to understand and measure investor’s sentiment and how it affects the financial markets, particularly in emerging economies.

Words: Samukelisiwe Cele
Photograph: Supplied

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