Oil prices, stock prices and the economy: examining volatility transmission in developing African countries

Abstract

The dependency of stock prices on the oil price volatility has been found to be more prevalent in emerging market net-oil importing countries. Most African countries are net-oil importer and the effect of the oil price volatility has significant impact on their economies. To answer the objectives of this study, this research employs the diagonal BEKK GARCH model, GMM model and the VECM over data from selected African countries from July 2003 – November 2019. The results from the diagonal BEKK Model suggests a co-movement between oil price volatility and stock price volatility does not appear to be directly linked to geography or economic relations between the sample countries due to financial globalization and integration. There is evidence of increased volatility during and after the 2007/08 crisis financial, with volatility more pronounced in the after math of the crisis. In examining the effects of the oil price volatility on the economic growth, the GMM results show that oil price and stock prices volatility have negative impacts on the economic growth. The empirical findings from the VECM suggest that a significant negative long run relationship between oil price volatility and economic growth exists. Furthermore, the results also indicate that oil price volatility is transmitted to the economy through the exchange rates, real interest rates, consumer price indices (rate of inflation) and the volatility of stock market returns. Finally, the pairwise Granger causality test indicate a uni-directional cause and effect that runs from oil price volatility to economic growth through stock price volatility.