The relationship between implied volatility and equity returns in South Africa

Faeezah Peerbhai, Damien Kunjal, Delane D. Naidu, Camiel Singh and Fabian Moodley

Afro-Asian Journal of Finance and Accounting, 2024, vol. 14, issue 1, 83-99

Abstract: This study investigates the relationship between implied volatility and stock market returns. Although previous studies on this topic only exist from an international context, this paper presents evidence from South Africa by examining the effect of the South African volatility index (SAVI) on different Johannesburg Stock Exchange (JSE) listed stock indices. The objectives of this study are to determine which GARCH model is most appropriate for modelling volatility in South Africa and whether the SAVI displays any relationship with the returns on equity indices. The study finds that the TGARCH model is the most suitable model for modelling volatility on the JSE. Thereafter, using a TGARCH model, it is observed that the SAVI is significantly positively related to the returns of all the chosen indices and that a leverage effect exists between them. The results provide important insight for investors, risk managers and policymakers.

Keywords: GARCH; implied volatility; returns; South African volatility index; SAVI; volatility modelling. (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ids:afasfa:v:14:y:2024:i:1:p:83-99

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