Abstract
This study sought to analyse volatility spillovers and sovereign credit rating related volatility shock effects through the lens of equity markets. The focus was set on BRICS (Brazil, Russia, India, China and South Africa) equity markets, with South Africa set as the fulcrum of the analysis.
With volatility dynamics observed between the South African Equity Market, and each of its BRICS partners, the key question was: Is the South African equity market a net receiver of volatility or a net transmitter of volatility? The secondary objective was to examine whether a significant relationship can be observed between the volatility shock effects observed in the South Africa equity market and the sovereign credit rating changes that would have emanated from each of its BRICS counterparts.
The key goal was to centre the analysis from a South African point of view as South Africa joined the BRICS formation late, and in many ways is significantly smaller than its BRICS counterparts hence it is important to understand the volatility dynamics it is exposed to as these have general risk implications for South African financial markets.
The study found that South Africa contributed the least to the volatility connectedness (measure of volatility spillover) observed between the BRICS Equity Markets. However, South Africa’s volatility connectedness was most influenced by Brazil. With regards to the volatility shocks evidenced in South Africa, volatility shocks originating from Brazil seemed to have a significant effect on South Africa more than those originating from other countries within the BRICS formation. This observation was in line with the finding that the volatility spillovers that affected BRICS most, as a whole, were those that emanated from Brazil. The perceived impact of the upgrade and downgrade announcements did not present as a consistent relationship across all countries. However, the key take away was that upgrade relationships, unexpectedly, were also related to significant received volatility shock effects in South Africa, just like the downgrade announcements.
The study used the Diebold-Yilmaz framework of volatility connectedness to examine the volatility spillovers and the ARMA-EGARCH framework to examine the sovereign credit rating related shocks.