Crude Oil Price Volatility and Returns on the JSE, South Africa

Rahim, Muazzam
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The primary aim of this research is to evaluate the impact of crude oil price volatility on the JSE Securities Exchange (JSE) in South Africa. The report employs an augmented market model developed by Faff and Brailsford (1999). This model establishes if there is a correlation between the volatility of crude oil prices and the economic group sectors of the JSE for a 10-year period extending January 2001 to December 2010. The augmented market model is adapted and two models, one with a localised oil price factor and the other with a pure oil price factor is applied to monthly data. The key findings are as follows. The first model finds significant positive sensitivity to the Oil and Gas sector index and significant negative sensitivity to the Industrials, Financials and the Consumer Services sector indices. The second model only finds significant negative correlation to the financial sector index. In addition to correlation, differentiation between sectors is also tested, where the market coefficients of 24 out of the 36 possible combinations were found to be statistically different. These results add weight to the argument that sectors are not all homogenous and that various factors can affect sector returns in different ways. The consideration of exposure to oil sensitivity could provide a broader perspective in the investment decision-making process. A highly diversified portfolio can thus be achieved by considering the status of oil price fluctuations and consequently increasing the accuracy of hedging the oil price risk, to maintain relatively steady returns. Organisations should be flexible to allow for increases in the oil price input costs to be adequately adjusted for and passed on to the consumer when possible.
MBA thesis - WBS
Johannesburg Secuties Exchange, Oil prices, Crude oil prices