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Political, economic, and financial country risks and the volatility of the South African Exchange Traded Fund market: A GARCH-MIDAS approach

Author

Listed:
  • Damien Kunjal

    (University of KwaZulu-Natal)

  • Faeezah Peerbhai

    (University of KwaZulu-Natal)

  • Paul-Francois Muzindutsi

    (University of KwaZulu-Natal)

Abstract

Despite the soaring popularity of Exchange Traded Funds (ETFs) in South Africa, country risk may have a minimal or no effect on ETFs because ETF investors can use a wide variety of market timing activities to minimize their exposure to country risks. This study investigated the effect of political, economic, and financial components of country risk on the volatility of the South African ETF market. A GARCH-MIDAS approach was employed to analyse a sample of South African ETFs from November 2000 to December 2019. The ETF market was segregated into a market of ETFs with domestic benchmarks and a market of ETFs with international benchmarks. The findings suggest that country risk components are significant sources of volatility in ETF markets except for financial risk which does not significantly impact ETFs with international benchmarks suggesting that these ETFs can be used to minimize an investor’s exposure to financial risk. Overall, this study provides new insight into the use of ETFs to diversify an investor’s exposure to different country risk components.

Suggested Citation

  • Damien Kunjal & Faeezah Peerbhai & Paul-Francois Muzindutsi, 2022. "Political, economic, and financial country risks and the volatility of the South African Exchange Traded Fund market: A GARCH-MIDAS approach," Risk Management, Palgrave Macmillan, vol. 24(3), pages 236-258, September.
    • Handle: RePEc:pal:risman:v:24:y:2022:i:3:d:10.1057_s41283-022-00093-y
    DOI: 10.1057/s41283-022-00093-y
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    Cited by:

    1. Damien Kunjal, 2022. "Evaluating the Liquidity Response of South African Exchange-Traded Funds to Country Risk Effects," Economies, MDPI, vol. 10(6), pages 1-20, June.

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    More about this item

    Keywords

    Economic risk; Exchange Traded Fund; Financial risk; GARCH-MIDAS; Market volatility; Political risk;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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