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The impact of oil and gold price fluctuations on the South African equity market: Volatility spillovers and financial policy implications

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  • Morema, Kgotso
  • Bonga-Bonga, Lumengo

Abstract

This paper assesses the impact of gold and oil price fluctuations on the volatility of the South African stock market and its component indices or sectors – namely, the financial, industrial and resource sectors – to infer the link between the commodity and stock markets in South Africa. Use is made of the vector autoregressive asymmetric dynamic conditional correlation generalised autoregressive conditional heteroskedasticity (VAR-ADCC-GARCH) model to this end. Moreover, the paper assesses the magnitude of the optimal portfolio weight, hedge ratio and hedge effectiveness for portfolios constituted of a pair of assets, namely oil-stock and gold-stock pairs. The findings of the study show that there is significant volatility spillover between the gold and stock markets, and the oil and stock markets. This finding suggests the importance of the link between the commodity and stock markets, which is essential for portfolio management. With reference to portfolio optimization and the possibility of hedging when using the pairs of assets under study, the findings suggest the importance of combining gold and stocks as the best strategy to hedge against stocks risk, especially during financial crises.

Suggested Citation

  • Morema, Kgotso & Bonga-Bonga, Lumengo, 2020. "The impact of oil and gold price fluctuations on the South African equity market: Volatility spillovers and financial policy implications," Resources Policy, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:jrpoli:v:68:y:2020:i:c:s0301420719305999
    DOI: 10.1016/j.resourpol.2020.101740
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    More about this item

    Keywords

    Hedge ratio; Optimal portfolio weight; ADCC model; Crises; Hedge effectiveness; Asymmetric; Risk; Safe haven;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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