Volatility Forecasting during Extreme Market Events Using the Mid Cap Share Index
Keywords:
Volatility, jse, covid-19, EWMA, GARCH, EXTREME EVENTSAbstract
The JSE underperformance in 2010 to 2019 as a consequence of a collapse in mid-cap share investments signified a high risk of investing in mid-cap companies. The outbreak of Covid-19 affected the optimal lambda and mid-cap share price returns during the analysis that was extended to 31 July 2020. For this purpose, the objective of the study is to forecast volatility at the end of day n-1 using the exponential weighted moving average and the general autoregressive conditional heteroscedasticity using the mid-cap share index (J201). Furthermore, the study aims to calculate the optimal lambda during the Covid-19 global pandemic. The models examined the negative relationship between share price returns and volatility during extreme events which led to fat tailed distribution of returns in share price returns. On December 2020 an unfavourable South African investment grade of negative BBB was assigned by Fitch Ratings and the days following the Covid-19 lockdown, share price returns plunged encouraging panic selling by risk averse investors.
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Adewuyi, A.W., 2016. Modelling Stock Prices with Exponential Weighted Moving Average (EWMA). Journal of Mathematical Finance, 6(1), pp.99-104
Amadeo, K. Mid-cap stocks and funds with their effect on the economy. https://www.thebalance.com Date of access: 28. Oct. 2020.
Ashburton investments. 2020. Have you considered investing in the JSE’s mid-cap shares? https://www.ashburtoninvestments.com Date of access: 25. Oct. 2020.
Biery, M. E. 2017. These industries generate the lowest profit margins. https://www.forbes.com Date of access: 27. Oct. 2020.
Brink, E. What low-risk, high-return investment vehicle can boost savings? https://www.moneyweb.co.za Date of access: 26. Oct. 2020.
Burkhardt, P. 2020. South Africa counts cost of chronic electricity shortages. https://www.bloomberg.com Date of access: 27. Oct. 2020.
Chang, T.Y., Hartzmark, S.M., Solomon, D.H. and Soltes, E.F., 2017. Being surprised by the unsurprising: Earnings seasonality and stock returns. The Review of Financial Studies, 30(1), pp.281-323.
Cont, R., 2007. Volatility clustering in financial markets: empirical facts and agent-based models. In Long memory in economics (pp. 289-309). Springer, Berlin, Heidelberg.
Country economy. 2007. GDPM improves in South Africa. https://www.countryeconomy.com Date of access: 25. Oct. 2020.
Cotterill, J. 2020. South Africa’s economy suffers worst quarterly slide in decades. https://www.ft.com Date of access: 26. Oct. 2020.
Danielsson, J., Valenzuela, M. and Zer, I., 2018. Learning from history: Volatility and financial crises. The Review of Financial Studies, 31(7), pp.2774-2805.
Doukas, J.A., Chansog (Francis) Kim and Pantzalis, C., 2010. Arbitrage risk and stock mispricing. Journal of Financial and Quantitative Analysis, pp.907-934.
Fitch Ratings. Ratings definitions. https://www.fitchratings.com Date of access: 24. Oct. 2020.
Guo, H., 2012, September. Estimating Volatilities by the GARCH and the EWMA model of PetroChina and TCL in the Stock Exchange Market of China. In 6th International Scientific Conference Managing and Modelling of Financial Risks, VSB-TU Ostrava, Faculty of Economics, Finance Department. (September) (pp. 191-202).
Herbert, W.E., Ugwuanyi, G.O. and Nwaocha, E.I., 2019. Volatility Clustering, Leverage Effects and Risk-Return Trade-Off in the Nigerian Stock Market. Journal of Finance and Economics, 7(1), pp.1-13.
Haasbroek, F. 2020. The impact of covid-19 on JSE listed companies. https://www.sashares.co.za Date of access: 27. Oct. 2020.
Hulbert, M. 2020. Opinion: why the smallest stocks may be quickest to recover from the coronavirus crash. https://www.marketwatch.com Date of access: 27. Oct. 2020.
Jackson, A. & Schmidt, J. Investing basics; mid-cap stocks. https://www.forbes.com Date of access: 26. Oct. 2020.
Kennon, J. 2020. The beginner’s step-by-step overview of how dividends work. https://www.thebalance.com Date of access: 27. Oct. 2020.
Kim, W. & Weisbach, M. S. 2005. Do firms go public to raise capital? NBER Working Paper Series. http://www.nber.org/papers/w11197 Date of access: 22. Oct. 2020.
Klein, M. 2019. High value opportunities in the small- and mid-cap space give nimble investors an edge. https://www.moneyweb.co.za Date of access: 25. Oct. 2020.
Klein, M. 2019. How to bet on the smaller guy: cover story-small-and mid-cap stocks. finweek, 2019(4 April), pp.30-36.
Kuen, T.Y. and Hoong, T.S., 1992. Forecasting volatility in the Singapore stock market. Asia Pacific Journal of Management, 9(1), pp.1-13.
Kumar, G. & Misra, A.K., 2015. Analysis of Liquidity-Study on Indian Mid-Cap Stocks. International Journal of Economics and Finance, 7(10), pp.112-125.
Krugel, L. & Viljoen, C. 2020. Covid-19 crash what South Africa can learn from previous market crashes. https://www.accountancysa.org.za Date of access: 26. Oct. 2020.
Kulp, K. 2019. How investors can mark the market’s seasons. https://money.usnews.com Date of access: 27. Oct. 2020.
Le Roux, S. 2018. Opportunities in small-, mid-cap shares. https://financialmarketsjournal.co.za Date of access: 25. Oct. 2020.
Martin, V. 2019. 8 small-cap stocks to buy for big-time growth potential. https://finance.yahoo.com Date of access: 25. Oct. 2020.
Montag & Caldwell. 2020. Why mid cap stocks might be a better option. https://www.montag.com Date of access: 27. Oct. 2020.
Muller, L., 2019. Valuation Multiples: Identifying Undervalued Stocks From 1987 to 2017. Major Themes in Economics, 21(1), pp.15-28.
Nilakantan, N.S., & Mistry, P. 2013. Volatility forecasting – a comparison of GARCH (1, 1) and EWMA models. https://www.researchgate.net Date of access: 27. Oct. 2020.
Pástor, Ľ. and Pietro, V., 2003. Stock valuation and learning about profitability. The Journal of Finance, 58(5), pp.1749-1789.
Penman, S. and Reggiani, F., 2014. The value trap: Value buys risky growth. Unpublished Paper, Columbia University and Bocconi University.
Reeves, J. 2020. 15 Mighty mid-cap stocks to buy for 2021. https://www.kiplinger.com Date of access: 28. Oct. 2020.
SARB. 2017. Domestic economic developments. https://www.resbank.co.za Date of access: 26. Oct. 2020.
Rizal, N.A., Wiryono, S.K. and Prasetyo, A.D., 2018. OPTIMAL ASSETS ALLOCATION FOR RISK AVERSE INVESTOR UNDER MARKET RISKS AND CREDIT RISK. International Journal of Business & Society, 19(1).
Shim, J.K. and Lansner, J., 2000. 101 Investment Tools for Buying Low & Selling High. CRC Press.
Stanlib. 2017. S&P decided to downgrade SA’s international credit rating to below investment grade and decided to retain the negative outlook. https://www.accountancysa.org.za Date of access: 27. Oct. 2020.
Steytler, N. and Powell, D., 2010. The impact of the global financial crisis on decentralized government in South Africa. L'Europe en Formation, (4), pp.149-172.
Teixeira, R. 2020. Does SA’s credit rating really impact you? https://www.bdo.co.za Date of access: 27. Oct. 2020.
Truter, C. Covid-19: impact on businesses and investment in South Africa. https://www.bowmanslaw.com Date of access: 25. Oct. 2020.
Vovchenko, N.G., Holina, M.G., Orobinskiy, A.S. and Sichev, R., 2017. Ensuring financial stability of companies on the basis of international experience in construction of risks maps, internal control and audit.
Wisdomtree. 2018. Discover the potential of mid-caps. https://www.wisdomtree.com. Date of access: 29. Oct. 2020.
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Published
2021-03-19
How to Cite
Selemela , S. M. ., Ferreira, S., & Mokatsanyane , D. (2021). Volatility Forecasting during Extreme Market Events Using the Mid Cap Share Index: Array. Acta Universitatis Danubius. Œconomica, 17(3). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/841
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Economic Development, Technological Change, and Growth
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