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Does the Source of Oil Price Shocks Matter for South African Stock Returns? A Structural VAR Approach

Author

Listed:
  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Mampho P. Modise

    (Department of Economics, University of Pretoria)

Abstract

In this paper, we investigate the dynamic relationship between different oil price shocks and the South African stock market using a sign restriction structural vector autoregression (VAR) approach for the period 1973:01 to 2011:07. The results show that for an oil-importing country like South Africa, stock returns only increase with oil prices when global economic activity improves. In response to oil supply shocks and speculative demand shocks, stock returns and the real price of oil move in opposite directions. The analysis of the variance decomposition shows that the oil supply shock contributes more to the variability in real stock prices. The main conclusion is that different oil price shocks affect stock returns differently and policy makers and investors should always consider the source of the shock before implementing policy and making investment decisions.

Suggested Citation

  • Rangan Gupta & Mampho P. Modise, 2013. "Does the Source of Oil Price Shocks Matter for South African Stock Returns? A Structural VAR Approach," Working Papers 201318, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201318
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    More about this item

    Keywords

    Oil price shocks; stock returns; sign-restrictions; structural vector autoregression;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G1 - Financial Economics - - General Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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