The impact of oil price shocks on stock market returns: Evidence from South Africa

Abstract

This paper seeks to determine whether there is any relationship between oil price shocks and the stock returns of South African firms. In recent periods, oil prices have risen significantly, and the price has been volatile. The volatility of oil price has drawn the attention of many researchers to study the impact oil supply and demand shocks on various economies. In this study shocks are split into three, namely crude oil supply shocks; shocks to the global demand for all industrial commodities; and global crude oil market demand specific, as opposed to a single oil price shock. This paper uses the vector autoregressive (VAR) model and the Vector Error Correction (VEC) models to quantify the effect of oil price shocks on South Africa’s stock returns. The primary variables used are exchange rate (USDZAR), global oil production, global oil price and the South African real stock returns. Structural shock to the exchange rate significantly explains fluctuation in the stock returns in the South African stock market case for most of the oil consuming industries. This study discovers that shocks in oil prices can be used to estimate the simultaneous relationship between stock return and stock volatility. The study points that oil price shocks are negatively related to stock returns of sectors that consume oil in their production of goods and services. However, the contribution of oil production and oil price to the fluctuation of the all share index are not quantitatively significant.