South African Sector Return Correlations: using DCC and ADCC Multivariate GARCH techniques to uncover the underlying dynamics.

Stellenbosch Working Paper Series No. WP17/2013
 
Publication date: 2013
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

This paper explores the dynamics of return co-movements between the largest economic sectors in South Africa, specifically with a view to shed light on the inter-sector diversification potential of domestic investors over time. It has been widely documented that investors have a home-bias when it comes to investing, and as such may be exposed to periods of increased co-movement between assets held locally across different sectors in their portfolios. Such periods of increased homogeneity in the movement of asset prices negate the benefits from diversification within the domestic financial market. The paper utilizes Dynamic Conditional Correlation (DCC) and Asymmetric-DCC Multivariate Generalized Autoregressive Conditional Heteroskedasticity (MV-GARCH) techniques to isolate the time-varying conditional correlations from the conditional variance component. These series are then used to study whether changes in market conditions and overall sentiment influence the dynamics and aggregate level of co-movement between sectors. The results firstly suggest that using static measures of historic co-movement between asset returns across sectors in order to evaluate a portfolio’s diversification potential are inaccurate. Significant leverage effects are also found in the dynamics of co-movement between the sector pairs, with negative shocks being followed in all cases by higher aggregate levels of co-movement. The results also suggest that periods of heightened global- and domestic market uncertainty magnifies the co-movements between sectors and in so doing undermines the ability of investors to diversify across local sectors.

 
JEL Classification:

C32, C51, C58, G11, G17

Keywords:

Conditional Variance, Multivariate GARCH, Dynamic Conditional Correlation, Sector Indices

Download: PDF (1.7 MB)

Login

(for staff & registered students)



Need a password?
Forgot your password?

Upcoming Seminars

No seminars are currently listed. Please check back soon.
 
More...

BER Weekly

1 March 2021
Even with the release of data showing a record high unemployment rate in 2020Q4, it turned out to be a fairly good week for the SA economy. Daily new COVID-19 infections remained well contained, while the second batch of 80 000 J&J vaccines arrived (albeit controversially with the grounded SAA being the carrier). In addition, relative to the October...

Read the full issue
 

Upcoming Seminars

No seminars are currently listed. Please check back soon.
 
More...

BER Weekly

1 March 2021
Even with the release of data showing a record high unemployment rate in 2020Q4, it turned out to be a fairly good week for the SA economy. Daily new COVID-19 infections remained well contained, while the second batch of 80 000 J&J vaccines arrived (albeit controversially with the grounded SAA being the carrier). In addition, relative to the October...

Read the full issue