Country Risk Dynamics and Stock Market Volatility: Evidence from the JSE Cross-Sector Analysis

Edson Vengesai, Adefemi A. Obalade and Paul-Francois Muzindutsi ()
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Paul-Francois Muzindutsi: University of Free State

Journal of Economics and Financial Analysis, 2021, vol. 5, issue 2, 63-84

Abstract: The rapid integration of the global markets and financial system has increased stock market volatility due to the increased exposure to various risks. Using different GARCH family models, this study investigates the impact of country risk components shocks on stock market return volatility of the Johannesburg Stock Exchange (JSE) and its sectors for the 1996-2018 period. High positive correlations were found among the sectors, which potentially erodes diversification benefits. The research found that the South African stock market volatility is mainly driven by own/internal shocks, while the effect of county risk shocks on stock return volatility differs across the JSE sectors. We found that financial risk shocks negatively transmit to the volatility of oil and gas sector returns, leading to an increase in conditional volatility. Regarding economic risk, we found a statistically significant relationship between economic risk shocks and the entire JSE and financial and oil and gas sectors. The results show that political risk shocks negatively transmit to stock return volatility in the industrial sector, basic materials, consumer goods, financial, and the oil and gas sectors, leading to higher conditional volatility. Thus, the return volatility of most of the JSE sectors is primarily affected by political dynamics, emphasising the role of political instability in destabilising stock market volatility.

Keywords: Country Risk; Stock Return; Volatility; GARCH Models; JSE, Stock Market Sectors. (search for similar items in EconPapers)
JEL-codes: D53 E44 G1 I10 L6 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:trp:01jefa:jefa0050

DOI: 10.1991/jefa.v5i2.a46

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