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This article examines the effect of financial liberalization on South African equity markets using Exponential Generalized Autoregressive Conditional Heteroscedastic (EGARCH) models. It utilises daily data and specifically, it analyses whether volatility persistence increased following financial liberalization. To achieve this objective, the study starts with endogenous structural break tests using Bai and Perron (2003) Ordinary Least Square (OLS)-type test and the Cumulative Sum (CUSUM)-type test of Inclan and Tiao (1994) and Sanso et al. (2004) respectively. These breaks are performed both in the stock returns and in the conditional variance over pre- and post-liberalization periods. The significant break points identified through algorithm are incorporated into EGARCH models and to obtain the effect of financial liberalization, the study further adds liberalization dummy using official liberalization dates. The findings show that none of the estimated break dates coincide with the official liberalization dates. The analysis further shows that after taking structural breaks into account volatility declines following financial liberalization. Also using official liberalization dates, the results indicate that the effect of financial liberalization on the stock markets is negative and statistically significant.
