Rand, Rates, and Returns: Unravelling the Volatility Nexus in South Africa’s Financial Markets

Abstract

This study investigates the volatility nexus between exchange rates, interest rates, and stock market returns in South Africa, an emerging economy characterised by deep financial integration and exposure to global capital flows. Using monthly data from January 2003 to February 2025, the analysis employs a multi-layered econometric framework combining asymmetric GARCH models (EGARCH and GJR-GARCH), an Asymmetric Dynamic Conditional Correlation (ADCC-GARCH) specification, and a GARCH-MIDAS–DCC approach that decomposes volatility into long-run and short-run components while modelling time-varying cross-market dependence. The findings indicate that exchange rate volatility is the dominant and most persistent driver of financial market risk, highlighting the central role of the South African rand in transmitting global shocks to domestic markets. Equity market volatility is largely shock driven and mean reverting, with sharp increases during major crisis episodes such as the Global Financial Crisis and the COVID-19 pandemic. Dynamic correlations across markets are persistent but predominantly negative between stock returns and exchange rates, while linkages involving interest rates are weaker and more episodic. Overall, the results suggest that South Africa’s financial volatility nexus operates primarily through exchange rate-driven transmission rather than short-run contagion effects.