The role of macroeconomic variables in the Johannesburg Stock Exchange's oil and gas stock returns

Abstract

The study pursued an investigation into the role of macroeconomic variables on the stock return volatility of the JSE's Oil and Gas sector, South Africa. The study focused on Brent crude oil prices, exchanger rate (R/$), Broad money supply and Gold Price as the selected macroeconomic variables. The GARCH–GED model to incorporate volatility was employed. Additionally, variance decomposition and impulse response were arrayed to test for shocks and forecast using secondary monthly data for the period 2007-2015. The findings were that change in oil prices and broad money supply had a positive and significant effect on the sector stock returns, 1% and 10% respectively, while changes in exchange rates and gold price had a negative and significant effect at 1%. There was clustering of volatility detected in the sector returns, but faded at a moderate speed. A recommendation is that both the oil price and exchange rate must be monitored by market players as they have significant positive shock effect in the short-run and persist in the long-run. Risk, portfolio managers and interest players should keenly monitor gold prices to negate any losses due to gold positive performance as an alternative to the Oil and Gas sector. Keywords: GARCH Model, Macroeconomic variables, Stock returns, Volatility