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Asymmetric volatility transmission between the real exchange rate and stock returns in South Africa

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  • Sikhosana, Ayanda
  • Aye, Goodness C.

Abstract

This paper analyses the asymmetric volatility spillovers between the real exchange rate and stock returns in South Africa. A Multivariate Exponential Generalised Autoregressive Conditionally Heteroskedastic (EGARCH) model alongside other asymmetric GARCH models (GJR GARCH and APARCH) were estimated using monthly data from 1996 to 2016 to examine the relationship. The results show that there is a bi-directional volatility spillover effect between the two markets in the short-run. Also these effects are asymmetric. These findings suggest that while information in one market can be used to forecast changes in the other, these financial assets should not be included in the same portfolio when diversifying risk.

Suggested Citation

  • Sikhosana, Ayanda & Aye, Goodness C., 2018. "Asymmetric volatility transmission between the real exchange rate and stock returns in South Africa," Economic Analysis and Policy, Elsevier, vol. 60(C), pages 1-8.
    • Handle: RePEc:eee:ecanpo:v:60:y:2018:i:c:p:1-8
    DOI: 10.1016/j.eap.2018.08.002
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    2. Khurram Shehzad & Umer Zaman & Xiaoxing Liu & Jarosław Górecki & Carlo Pugnetti, 2021. "Examining the Asymmetric Impact of COVID-19 Pandemic and Global Financial Crisis on Dow Jones and Oil Price Shock," Sustainability, MDPI, vol. 13(9), pages 1-13, April.
    3. Huang, Qian & Wang, Xiangning & Zhang, Shuguang, 2021. "The effects of exchange rate fluctuations on the stock market and the affecting mechanisms: Evidence from BRICS countries," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    4. Muntazir Hussain & Usman Bashir & Ramiz Ur Rehman, 2024. "Exchange Rate and Stock Prices Volatility Connectedness and Spillover during Pandemic Induced-Crises: Evidence from BRICS Countries," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(1), pages 183-203, March.
    5. Alovokpinhou, Sedjro Aaron & Malikane, Christopher, 2024. "The effect of output and the real exchange rate on equity price dynamics," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    6. Goodness C. Aye & Laurence Harris, 2019. "The effect of real exchange rate volatility on income distribution in South Africa," WIDER Working Paper Series wp-2019-29, World Institute for Development Economic Research (UNU-WIDER).
    7. Saadati, Alireza & Honarmandi, Zahra & Zarei, Samira, 2020. "Real Exchange Rate Shocks and Export-Oriented Businesses in Iran: An Empirical Analysis Using NARDL Model," MPRA Paper 101554, University Library of Munich, Germany, revised 30 Jun 2020.
    8. Ogunsanya, Ibukun & Wasiu Adamson, Temitope, 2024. "Exchange Rate Movement And Stock Returns In Most Capitalised Economies In Sub-Saharan Africa," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 11(1), pages 18-37, June.
    9. Afees A. Salisu & Kazeem Isah & Nnenna Ogbonnaya‐Orji, 2022. "A firm level analysis of asymmetric response of U.S. stock returns to exchange rate movements," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1220-1239, January.
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    More about this item

    Keywords

    Volatility; Stock market; Risk; Exchange rates; Asymmetry;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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