Edson Vengesai

Type of the article: Research Article

Abstract
To enhance risk management techniques, this study attempts to evaluate the feasibility of treating volatility as a distinct asset class in portfolio diversification strategies. In particular, it examines dynamic conditional correlations and spillover effects between equity returns across Johannesburg Stock Exchange (JSE) indices and volatility (as determined by the VIX and the South African Volatility Index – SAVI), both before and during the COVID-19 pandemic (2010 to 2022). By extending the analysis beyond the global VIX to also include the local SAVI, the study provides insights into the role of volatility in emerging economies. The study employed the Multivariate GARCH models: the Dynamic Conditional Correlation (DCC) GARCH of Engle and the Baba, Engle, Kraft, and Kroner (BEKK) model proposed by Engle and Kroner. We found evidence of volatility spillovers from the VIX to the South African equity indices. However, the VIX did not exhibit a significant response to volatility in the South African market. The study revealed consistent and significant negative correlations between volatility (VIX & SAVI) and JSE broad market indices, with these correlations further decreasing during the pandemic. Additionally, the SAVI showed notably lower correlations with the JSE market compared to the VIX, suggesting its distinct role in conveying risk perception and market expectations specific to the JSE.