An Examination of the Volatility of South African Risk-Free Rate Proxies: A Component Garch Analysis

A Charteris and B Strydom

Studies in Economics and Econometrics, 2011, vol. 35, issue 3, 49-64

Abstract: He Capital Asset Pricing Model has become the standard model for estimating the required rate of return on equity. Application of themodel requires the selection of proxies for key inputs including the risk- free asset. Despite the clear theoretical requirements for the risk-free asset a surprising divergence is evident in the proxies employed, particularly in the choice of a short-term or longer-term government security. This paper employs the Component GARCH model to examine the volatility of the most commonly used proxies. We find that for both South African and United States Treasury securities long-term shocks have a more sustained impact on future volatility than short- term shocks to the system and that for South African Treasury-Bonds negative shocks have a greater impact on volatility than positive shocks of equal magnitude. The returns on South African Treasury-Bills are found to include a risk premium for the volatility in their returns unlikeU.S. government securities or longer-term South African Treasury- Bonds. This volatility risk premium contravenes the requirements of a risk-free asset and provides empirical evidence that in the South African context, Treasury-Bills are not an appropriate proxy for the risk- free asset and that Treasury-Bonds should be employed instead.

Date: 2011
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/10800379.2011.12097225 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:rseexx:v:35:y:2011:i:3:p:49-64

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/rsee20

DOI: 10.1080/10800379.2011.12097225

Access Statistics for this article

Studies in Economics and Econometrics is currently edited by Willem Bester

More articles in Studies in Economics and Econometrics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().