A Markov regime switching approach to estimating the volatility of Johannesburg Stock Exchange (JSE) returns

  • 339 Views
  • 14 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License

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.

view full abstract hide full abstract
    • Figure 1. Trend of JSE All-Share Index over the period January 2003 – December 2017
    • Figure 2. The log returns of JSE All-Share Index over the period January 2003 – December 2017
    • Figure 3. Histogram and the Q-Q plots of the returns
    • Figure 4. Trace of MCMC samples for the parameters of the two-regime EGARCH model with skewed Student t innovations
    • Figure 5. The smoothed probabilities of the high volatility regime
    • Table 1. Summary statistics of the returns
    • Table 2. Deviance Information Criteria of the models
    • Table 3. Two-regime EGARCH with skewed Student t innovations
    • Table 4. Results of the backtest