Does Oil Price Uncertainty Matter for Stock Returns in South Africa?

This paper examines the impact of oil price uncertainty on South Africa’s stock returns using weekly data that covers 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 show that oil price uncertainty had negative but marginally significant effect on stock returns. 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.