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This study is aimed at investigating the volatility dynamics and the risk-return relationship in the South African market, analyzing the FTSE/JSE All Share Index returns for an updated sample period of 2009–2019. The study employed several GARCH type models with different probability distributions governing the model’s innovations. Results have revealed strong persistent levels of volatility and a positive risk-return relationship in the South African market. Given the elaborate use of the GARCH approach of risk estimation in the existing finance literature, this study highlighted several weaknesses of the model. A noteworthy property of the GARCH approach was that the innovation distributions did not affect parameter estimation. Analyzing the GARCH type models, this theory was supported by the majority of the GARCH test results with respect to the volatility dynamics. On the contrary, it was strongly unsupported by the risk-return relationship. More specifically, it was found that while the innovations of the EGARCH (1, 1) model could account for the volatile nature of financial data, asymmetry remained uncaptured. As a result, misestimating of risks occurred, which could lead to inaccurate results. This study highlighted the significance of the innovation distribution of choice and recommended the exploration of different nonnormal innovation distributions to aid with capturing the asymmetry.

Volatility dynamics and the risk-return relationship in South Africa: A GARCH approach