Structural breaks and GARCH models of stock return volatility : the case of South Africa
Loading...
Date
Authors
Babikir, Ali
Owusu-Sekyere, Emmanuel
Journal Title
Journal ISSN
Volume Title
Publisher
University of Pretoria, Department of Economics
Abstract
This paper investigates the empirical relevance of structural breaks in forecasting stock return volatility using both in-sample and out-of-sample tests and daily returns for the Johannesburg
Stock Exchange (JSE) All Share Index from 07/02/1995 to 08/25/2010. We find evidence of
structural breaks in the unconditional variance of the stock returns series over the period, with high levels of persistence and variability in the parameter estimates of the GARCH (1, 1) model across the sub-samples defined by the structural breaks. This indicates that structural breaks are empirically relevant to stock return volatility in South Africa. In out-of-sample tests, we find that combining forecasts from different benchmark and competing models that accommodate
structural breaks in volatility improves the accuracy of volatility forecasting. Furthermore, for shorter horizons, the MS-GARCH model better captures asymmetry in stock return volatility than the GJR-GARCH (1, 1) model, which better suited to longer horizons, but in general, the asymmetric models fail to outperform the GARCH (1,1) model.
Description
Keywords
Stock return volatility, Structural breaks, In-sample tests, Out-of-sample tests, GARCH models
Sustainable Development Goals
Citation
Babikir, A, Gupta, R, Mwabutwa, C & Owusu-Sekyere, E 2010, 'Structural breaks and GARCH models of stock return volatility: the case of South Africa', University of Pretoria, Department of Economics, Working paper series, no. 2010-30. [http://web.up.ac.za/default.asp?ipkCategoryID=736&sub=1&parentid=677&subid=729&ipklookid=3]