Abstract
The study used the Markov regime switching model to investigate the presence of regimes in the volatility dynamics of the returns of JSE All-Share Index (ALSI). Volatility regimes are as a result of sudden changes in the underlying economy generating the market returns. In all, twelve candidate models were fitted to the data. Estimates from the regime switching model were compared to the industry standard non-switching GARCH (1,1) using the Deviance Information Criteria (DIC). The results show that the two-regime switching EGARCH model with skewed Student t innovations describes better the return of the JSE Index. Additionally, we backtest the model results in order to confirm our findings that the two-regime switching EGARCH is the best of the models for the sample period.
Highlights
The estimation of volatility of returns to financial assets has been a major preoccupation of both practitioners and academics in finance and its related disciplines ever since financial markets as we know them today existed
Estimates from the regime switching model were compared to the industry standard non-switching generalized autoregressive regressive conditional heteroscedasticity (GARCH) (1,1) using the Deviance Information Criteria (DIC)
The results show that the two-regime switching EGARCH model with skewed Student t innovations describes better the return of the JSE Index
Summary
The estimation of volatility of returns to financial assets has been a major preoccupation of both practitioners and academics in finance and its related disciplines ever since financial markets as we know them today existed. The study used the Markov regime switching model to investigate the presence of regimes in the volatility dynamics of the returns of JSE All-Share Index (ALSI). Volatility regimes are as a result of sudden changes in the underlying economy generating the market returns.
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