Abstract:
This paper examines the impact of oil price uncertainty on South Africa’s stock returns using weekly data that cover
the period 1995:07:01 to 2014:08:30. The measure of oil price uncertainty is the conditional standard deviation of the
one-step-ahead forecast error for the change in the price of oil. A bivariate GARCH-in-mean vector autoregressive
model was used for analysis. The results with oil price in US Dollars show that oil price uncertainty had negative but
marginally significant effect on stock returns. However, when oil price is converted to Rands, the effect is still negative
effect but significant at 5%. The study also finds that accounting for oil price uncertainty in an oil price-stock returns
equation tends to amplify the negative dynamic response of stock returns to a positive oil shock, while diminishing the
response of stock returns to a negative oil price shock compared to a model which excludes oil price uncertainty from
entering the oil price-stock returns equation. Furthermore, the response of stock returns to negative and positive oil
price uncertainty shocks is asymmetric.
