Expected Returns and Volatility on the JSE Securities Exchange of South Africa

Abstract

This paper explores the relevance of ARCH-type models in explaining stock return dynamics on the JSE. Although the evidence suggests that volatility is prevalent on this market, it is established that the effects of shocks on volatility are symmetric, and that volatility is not a commonly priced factor. Hence, the standard GARCH (1, 1) model provides the best description of return dynamics relative to its complex augmentations. Further, the model significantly, but less than fully, accounts for the observed non-linearities in the series.