Analyzing the Impact of Oil Price Fluctuations on Equity Markets in Africa

Abstract

This study investigates the impact of crude oil and crude palm oil spot and futures prices on African equity markets, utilizing daily data spanning from January 2000 to July 2020, sourced from Bloomberg. The analysis employs a vector error correction model to explore the relationships and dynamics between these variables. The econometric findings reveal significant differences in the speed of adjustment across various African equity markets. Mauritius, whose economy is heavily reliant on tourism, exhibited a faster response to changes in crude oil and palm oil prices compared to other markets. Kenya's equity market index responded positively, especially in comparison to the equity markets of Morocco and Nigeria. In contrast, South Africa's equity market adjusted more slowly than the others in response to price fluctuations. A particularly noteworthy insight is the slow adjustment of Morocco and Nigeria's equity markets to shocks in the crude oil market, which is attributed to the high dependence of these countries' governments on crude oil revenues for financing economic activities. This dependency makes their equity markets more vulnerable to oil price volatility. The study confirms the existence of a long-term relationship between crude oil, crude palm oil spot and futures prices, and the equity markets in these African countries. Furthermore, the vector error correction model Granger causality test was applied to assess the direction of influence among these variables. The results indicate that crude oil spot and futures prices Granger-cause movements in the equity markets of Mauritius, Kenya, and Morocco. Meanwhile, futures prices of crude oil specifically Granger-cause changes in Nigeria's and South Africa's equity markets. These findings underscore the importance of crude oil and palm oil markets in shaping the performance of African equity markets and highlight the varying degrees of sensitivity across different countries. The results have important implications for policymakers and investors, particularly in understanding the risks and opportunities associated with oil price fluctuations in these markets.