Abstract

We investigate the risk-return relation in the South African stock market using data covering the period from 1973 to 2011. Prior research for several countries reveals high sensitivity of the results to data details and models used. Therefore, our analysis of the risk-return nexus in South Africa are based on three different data frequencies (weekly, monthly and quarterly) and are derived from three different generalized autoregressive conditional heteroskedasticity (GARCH) models in addition to a plain vanilla time-series approach. Similar to the findings of Glosten et al. in 1993 and Harvey in 2001, our results fail to support a significantly positive risk-return relationship in South Africa across various data frequencies and model specifications, and this conclusion survives further robustness checks using different sub-periods and index data. Our results further suggest that the recent global financial crisis may have altered market dynamics and distorted the risk-return relation in the South African stock market.

Key words: Risk-return relationship, volatility models, conditional variance, South African stock market.