Risk-return tradeoff and the behaviour of volatility on the South African stock market: Evidence from both aggregate and disaggregate data
AbstractThe study analyses the nature and behaviour of volatility, the risk-return relationship and the long-term trend of volatility on the South African equity markets, using aggregate-level, industrial-level and sectoral-level daily data for the period 1995-2009. By employing dummy variables for the Asian and the sub-prime financial crises and the 11 September political shock, the study further examines whether the long-term trend of volatility structurally breaks during financial crises and major political shocks. Three time-varying GARCH models were employed: one of them symmetric, and the other two asymmetric. Each of these models was estimated based on three error distributional assumptions. The findings of the study are as follows: Firstly, volatility is largely persistent and asymmetric. Secondly, risk at both the aggregate and disaggregate level is generally not a priced factor on the South African stock market. Thirdly, the TARCH-M model under the Generalised Error Distribution is the most appropriate model for conditional volatility of the South African stock market. Fourthly, volatility generally increases over time and its trend structurally breaks during financial crises and major global shocks. The policy and investment implications of the findings are outlined.
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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 198.
Length: 31 pages
Date of creation: 2010
Date of revision:
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Risk-return tradeoff; stock market volatility; asymmetric GARCH models;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-AFR-2010-12-11 (Africa)
- NEP-ALL-2010-12-11 (All new papers)
- NEP-RMG-2010-12-11 (Risk Management)
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- Tinashe Harry Dumile Kambadza & Zivanemoyo Chinzara, 2012. "Returns Correlation Structure and Volatility Spillovers Among the Major African Stock Markets," Working Papers 305, Economic Research Southern Africa.
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