Abstract
Ph.D.
This thesis investigates the impact of domestic and foreign financial crises
on volatility dynamics in South Africa. In a sample ranging from January
1994 to March 2009, Chapter 2 provides empirical support for the theory that
domestic currency crises are associated with significant structural changes in
daily exchange rate volatility. Speciacally, crisis periods coincide with large
positive shifts in unconditional variance. Using this fact, we propose a new
method - the structural change generalised conditional heteroskedasticity, or
SC-GARCH, model - for identifying precise start- and end-dates for crises.
Chapter 3 studies volatility transmission within SA from October 1996 to
June 2010. Using a generalised version of the vector autoregressive (VAR)
approach, time-varying and bidirectional volatility spillover indices are esti-
mated for domestic currency, bond and equity markets. The results identify
equities as the primary source of volatility transfer to other asset classes. At
di erent points in time, spillovers are responsible for anywhere between 7.5
and 65 percent of system-wide volatility. Local maxima in spillover magni-
tudes are estimated during domestic, as well as foreign crisis periods.
Chapter 4 estimates time-varying comovement between SA and world
volatilities during the period from 1994 to 2008. A dynamic factor model
(FM) is used to extract three latent global volatility factors from a data panel
which is representative of the world equity market portfolio. Relative to most
other emerging markets, the global factors are poor predictors of volatility
in SA. However, SA's comovement with global volatility increases sharply in
response to emerging market crises in Asia (1997-8) and Russia (1998). The
global factors are also important determinants of domestic volatility during
the latter stages of the US subprime crisis (2007-8).
Chapter 5 proposes the factor-augmented VAR as a parsimonious model
for the transmission of foreign volatility shocks to SA equities. We compare
international volatility transmission resulting from crises in Asia (1997-8) and
the US (2007-8). Although the US crisis has a larger impact on the world
equity market, the Asian shock leads to more dramatic increases in volatility
in emerging economies, including SA.