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.
