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Political, economic, and financial country risks and the volatility of the South African Exchange Traded Fund market: A GARCH-MIDAS approach

Political, economic, and financial country risks and the volatility of the South African Exchange... Despite the soaring popularity of Exchange Traded Funds (ETFs) in South Africa, country risk may have a minimal or no effect on ETFs because ETF investors can use a wide variety of market timing activities to minimize their exposure to country risks. This study investigated the effect of political, economic, and financial components of country risk on the volatility of the South African ETF market. A GARCH-MIDAS approach was employed to analyse a sample of South African ETFs from November 2000 to December 2019. The ETF market was segregated into a market of ETFs with domestic benchmarks and a market of ETFs with international benchmarks. The findings suggest that country risk components are significant sources of volatility in ETF markets except for financial risk which does not significantly impact ETFs with international benchmarks suggesting that these ETFs can be used to minimize an investor’s exposure to financial risk. Overall, this study provides new insight into the use of ETFs to diversify an investor’s exposure to different country risk components. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Risk Management Springer Journals

Political, economic, and financial country risks and the volatility of the South African Exchange Traded Fund market: A GARCH-MIDAS approach

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References (79)

Publisher
Springer Journals
Copyright
Copyright © The Author(s), under exclusive licence to Springer Nature Limited 2022
ISSN
1460-3799
eISSN
1743-4637
DOI
10.1057/s41283-022-00093-y
Publisher site
See Article on Publisher Site

Abstract

Despite the soaring popularity of Exchange Traded Funds (ETFs) in South Africa, country risk may have a minimal or no effect on ETFs because ETF investors can use a wide variety of market timing activities to minimize their exposure to country risks. This study investigated the effect of political, economic, and financial components of country risk on the volatility of the South African ETF market. A GARCH-MIDAS approach was employed to analyse a sample of South African ETFs from November 2000 to December 2019. The ETF market was segregated into a market of ETFs with domestic benchmarks and a market of ETFs with international benchmarks. The findings suggest that country risk components are significant sources of volatility in ETF markets except for financial risk which does not significantly impact ETFs with international benchmarks suggesting that these ETFs can be used to minimize an investor’s exposure to financial risk. Overall, this study provides new insight into the use of ETFs to diversify an investor’s exposure to different country risk components.

Journal

Risk Management – Springer Journals

Published: Sep 1, 2022

Keywords: Economic risk; Exchange Traded Fund; Financial risk; GARCH-MIDAS; Market volatility; Political risk; E44; G10; G11

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