Abstract
This study investigates whether South African sovereign credit risk volatility, measured through 5-year credit default swap (CDS) volatility, carries predictive information for domestic equity performance, with a focus on the South African environmental, social and governance (SAESG) and technology-oriented (JTech) indices. Prompted by the elevated fiscal uncertainty in emerging markets and the increasing prominence of sustainability-focused and innovation-driven assets, this study investigates whether these equity indices exhibit hedge-like characteristics against sovereign risk fluctuations. Using a suite of econometric frameworks, namely, Westerlund and Narayan (WN) bias-adjusted regressions and Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) correlations, the findings indicate that sovereign CDS volatility exhibits economically small and statistically insignificant predictive effects across robust specifications. . Under the Autoregressive Conditional Heteroskedasticity- generalized least squares (ARCH-GLS) variant of the WN test, sovereign CDS volatility displays marginal statistical significance at the 5% level (bootstrap p ≈ 0.036), with estimated coefficients indicating that a 1% increase in CDS volatility is associated with less than a 0.02% change in SAESG returns, reflecting negligible economic magnitude . However, these relationships vanish once volatility persistence is fully accounted for under a GARCH(1,1) framework where coefficients become statistically insignificant (bootstrap p > 0.10) and joint predictability tests fail to reject the null hypothesis (F = 0.697, p = 0.561)], confirming the absence of robust predictive content. The DCC-GARCH analysis supports this interpretation, revealing persistently low and mildly positive conditional correlations for the SAESG Index within a narrow positive range of approximately 0.02 to 0.08 , while correlations for the JTech Index remain centred around zero, typically within ±0.05, indicating limited co-movement and no consistent safe-haven behaviour. Collectively, these findings indicate that sovereign credit risk volatility exerts only a limited, state-dependent influence on South African equities, with limited hedging effectiveness and negligible forecasting usefulness at daily frequencies . Overall, while sovereign CDS volatility remains an important gauge of systemic macrofinancial stress, it does not serve as a robust predictor of high-frequency equity returns in South Africa. Both statistical insignificance under bias-adjusted models and extremely small coefficient magnitudes confirm the absence of...