Abstract
This paper studies the association between risk and returns in the Johannesburg Stock Exchange. In particular, the study is interested in modelling this relationship during periods of high volatility with special reference to the 2007-2009 financial crises. The objective is to highlight the effect that a high volatility period might have on the relationship. To achieve this objective, daily data for the market index, JSE Top 40 and the two JSE sectoral indices for the period 1/1/2004 to 3/5/2017 are used. The GARCHM, E-GARCH-M and TARCH-M models and the same aforementioned models with dummy variables to account for two volatility regimes are used. The CAPM prediction that the expected return on a stock above the risk-free rate is positive is not supported by the study. The tests conducted to examine the relationship observed that the risk premiums were either positive but insignificant, or negative and significant, which is inconsistent with the theory. The observed outcomes indicate that the risk premium is not necessarily positive, even after accounting for different regimes. These results are generally in line with observations made by other authors who investigated the relationship within the South African context. The findings of this paper are useful in financial decision-making, such as in providing investors with information on which sectors to invest in based on their risk appetite, as well as providing information regarding the performance of the different stocks in the market in terms of risk and return.
M.Com. (Financial Economics)