Structural breaks and GARCH models of stock return volatility : the case of South Africa

Loading...
Thumbnail Image

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]