This paper investigates the empirical relevance of structural breaks in forecasting stock return volatility using both in-sample and out-of-sample tests and daily returns for the Johannesburg Stock Exchange (JSE) All Share Index from 07/02/1995 to 08/25/2010. We find evidence of structural breaks in the unconditional variance of the stock returns series over the period, with high levels of persistence and variability in the parameter estimates of the GARCH (1, 1) model across the sub-samples defined by the structural breaks. This indicates that structural breaks are empirically relevant to stock return volatility in South Africa. In out-of-sample tests, we find that combining forecasts from different benchmark and competing models that accommodate structural breaks in volatility improves the accuracy of volatility forecasting. Furthermore, for shorter horizons, the MS-GARCH model better captures asymmetry in stock return volatility than the GJR-GARCH (1, 1) model, which better suited to longer horizons, but in general, the asymmetric models fail to outperform the GARCH (1,1) model. Keywords: stock return volatility, structural breaks, in-sample tests, out-of-sample tests, GARCH Models.JEL classification: C22, C53, G11, G12 ♦ We would like to thank Professor Mehmet Bacilar for many helpful comments. However, any errors are solely ours.
The objective of the paper is to assess whether financial reforms have a statistically significant effect on Malawi consumption behaviour. More specifically, the paper examines the existence of Permanent Income Hypothesis (PIH) and assesses whether the reforms have affected consumption behaviour by reducing liquidity constraints using Instrumental Variable and Two Stage Least Squares (IV-TSLS) approach. The paper finds that the PIH does not hold in Malawi and most consumers are current income consumers. They consume from "hand to mouth" and very little is left to smooth consumption in their life time. Empirical evidence from the thesis shows that the main failure of the PIH hypothesis is due to liquidity constraint which is manifested in the under development of the financial market and unstable macroeconomic conditions in Malawi. Weak financial institutions, both structural and operational have impacted negatively on the accessibility of financial resources for most Malawians despite the reforms. This is a bigger lesson for policy makers to consider in the preparation of future broad based financial reforms.
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