An ARCH/GARCH arbitrage pricing theory approach to modelling the return generating process of South African stock returns.
Date
2013-08-14
Authors
Szczygielski, Jan Jakub
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Abstract
This study investigates the return generating process underlying the South African
stock market. The investigation of the return generating process is framed within
the Arbitrage Pricing Theory (APT) framework with the APT reinterpreted so as to
provide a conceptual framework within which the return generating process can be
investigated. In modelling the return generating process, the properties of South
African stock returns are taken into consideration and an appropriate econometric
framework in the form of Autoregressive Conditional Heteroscedastic (ARCH) and
Generalized Autoregressive Conditional Heteroscedastic (GARCH) models is
applied. Results indicate that the return generating process of South African stock
returns is described by innovations in multiple risk factors representative of several
risk categories. The multifactor model of the return generating process explains a
substantial amount of variation in South African stock returns and the
ARCH/GARCH methodology is an appropriate econometric framework for the
estimation of models of the return generating process. The APT framework is
successfully applied to model and investigate the return generating process of
South African stock returns.
Description
Keywords
Arbitrage pricing theory, Autoregressive conditional heteroscedastic, Generalized autoregressive conditional heteroscedastic, ARCH, GARCH, Time series, Risk factors, Multifactor model, Return generating process