Title: The relationship between implied volatility and equity returns in South Africa

Authors: Faeezah Peerbhai; Damien Kunjal; Delane D. Naidu; Camiel Singh; Fabian Moodley

Addresses: School of Accounting, Economics and Finance, University of KwaZulu-Natal, South Africa ' Department of Business Management, University of the Free State, South Africa ' School of Economics and Finance, University of the Witwatersrand, South Africa ' School of Accounting, Economics and Finance, University of KwaZulu-Natal, South Africa ' School of Accounting, Economics and Finance, University of KwaZulu-Natal, South Africa

Abstract: This study investigates the relationship between implied volatility and stock market returns. Although previous studies on this topic only exist from an international context, this paper presents evidence from South Africa by examining the effect of the South African volatility index (SAVI) on different Johannesburg Stock Exchange (JSE) listed stock indices. The objectives of this study are to determine which GARCH model is most appropriate for modelling volatility in South Africa and whether the SAVI displays any relationship with the returns on equity indices. The study finds that the TGARCH model is the most suitable model for modelling volatility on the JSE. Thereafter, using a TGARCH model, it is observed that the SAVI is significantly positively related to the returns of all the chosen indices and that a leverage effect exists between them. The results provide important insight for investors, risk managers and policymakers.

Keywords: GARCH; implied volatility; returns; South African volatility index; SAVI; volatility modelling.

DOI: 10.1504/AAJFA.2024.136131

Afro-Asian Journal of Finance and Accounting, 2024 Vol.14 No.1, pp.83 - 99

Received: 26 Apr 2021
Accepted: 27 Dec 2021
Published online: 18 Jan 2024 *