Abstract:
We investigated the behaviour of returns of the Johannesburg Stock Exchange All Share Index using
asymmetrical exponential-GARCH(1,1) and GJR-GARCH(1,1) incorporating the market reactions to
news. We noted the returns distribution is skewed and have fat-tails with respect to the normal
distribution. Thus we chose the skewed student t-distribution asymmetry to model the behaviour of the
tails and capture the asymmetry in the distribution of the returns. The GJR-GARCH(1,1) with the
skewed student t-distribution was found to be appropriate in describing the data generation process for
the returns. The market was shown to react to news unequally. Volatility spikes sharply when
unexpected adverse news reaches the market while remaining unresponsive for a large part to positive
news. For investors this has implications for trading strategies and risk management with respect to
equity portfolio risk and returns on the stock exchange. Bad news reaching the market can destabilize
their portfolios. Risk mitigating actions by way of 'hedging' against the noise in the news is warranted.
