Macroeconomic uncertainty and emerging market stock market volatility: The case for South Africa

This paper analyses how systematic risk emanating from the macro-economy is transmitted into stock market volatility using augmented autoregressive GARCH (AR-GARCH) and Vector autoregression models. Also examined is whether the relationship between the two is bidirectional. By imposing dummies for the 1997-98 Asian and the 2007-2008 sub-prime financial crises, the study further analyses whether financial crises affect the relationship between macroeconomic uncertainty and stock market volatility. The findings show that macroeconomic uncertainty significantly influences stock market volatility. Although volatilities in inflation, the gold price and the oil price seem to play a role, it is found that volatility in short-term interest rates and exchange rates are the most important, suggesting that South African domestic financial markets are increasingly becoming interdependent. Finally, the results show that financial crises increase volatility in stock market and in most macroeconomic variables and, by so doing, strengthen the effects of changes in macroeconomic variables on the stock market.

Risk-return tradeoff and the behaviour of volatility on the South African stock market: Evidence from both aggregate and disaggregate data

The 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.Risk-return tradeoff, stock market volatility, asymmetric GARCH models

Dynamic Returns Linkages and Volatility Transmission between South African and World Major Stock Markets

This paper analyses returns and volatility linkages between the South African (SA) equity market and the world major equity markets using daily data for the period 199-2007. Also analysed is the nature of volatility, the long term trend of volatility and the risk-premium hypothesis. The univariate GARCH and multivariate Vector Autoregressive models are used. Results show that both returns and volatility linkages exist between the SA and the major world stock markets, with Australia, China and the US showing most influence on SA returns and volatility. Volatility was found to be inherently asymmetric but reasonably stable over time in all the stock markets studied, and no significant evidence was found in support of the risk-premium hypothesis.Reruns and volatility linkages; exponential GARCH; GARCH-in-mean; Vector Autoregressive; Portfolio DiversiÂ…cation; Financial Stability

Bank concentration and the interest rate pass-through in Sub-Saharan African countries

This study investigates the link between bank concentration and interest rate pass-through (IRPT) in four sub-Saharan countries. It also analyses whether there is asymmetry in IRPT and whether such asymmetry is related to changes in bank concentration. By applying a number of econometric methods including Asymmetric Error Correction Models, Mean Adjustment Lag (MAL) models and Autoregressive Distributed Lag models on monthly data for the period 1994-2007, the study found some evidence of a relationship between bank concentration and IRPT in all four countries. However, the results reveal that bank concentration has a stronger influence on the magnitude of its adjustment rather than its speed. Of particular note in this investigation is the fact that the findings support both the Structure-Conduct-Performance hypothesis and the competing Efficient-Structure hypothesis in the banking industries of the four countries. While there is some evidence supporting the view that bank lending and deposit rates adjust asymmetrically to changes in policy rates, there is very limited evidence that these asymmetries are a result of bank concentration. The key implication of the result for African countries is that increased bank concentration through bank consolidation programmes designed to strengthen banking industries should not be viewed with cynicism in so far as monetary policy transmission is concerned because concentration does not necessarily undermine the effectiveness of monetary policy.Bank Concentration Monetary Policy Interest Rate Pass-Through Asymmetric Adjustment Sub-Saharan Africa