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Structural Breaks and GARCH Models of Stock Return Volatility: The Case of South Africa

Ali Babikir, Rangan Gupta, Chance Mwabutwa () and Emmanuel Owusu-Sekyere ()
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Ali Babikir: Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa
Chance Mwabutwa: Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa
Emmanuel Owusu-Sekyere: Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa

No 201030, Working Papers from 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.

Keywords: stock return volatility; structural breaks; in-sample tests; out-of-sample tests; GARCH Models (search for similar items in EconPapers)
JEL-codes: C22 C53 G11 G12 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010-12
New Economics Papers: this item is included in nep-afr and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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