Empirical Analysis of the Oil Shocks-Stock Returns Relationship: A Sectoral Disaggregation for Nigeria

Abstract

This paper investigated the impact of crude oil price shocks on the returns and volatility of the Nigerian stock market. Since not all industries are expected to be equally affected by oil price changes, we conducted our study at the disaggregate firm level for two sectors namely Banking and Oil &Gas. A bivariate VAR-GARCH model was employed for the daily observations of Brent crude oil price and the closing share values of the 12 firms over the period January 1, 2000 to December 31, 2015. The empirical findings showed that the returns on stock market are significantly affected by their own past values suggesting some evidence of short-term predictability in stock market changes. For the Banking sector past oil shocks drive stock price volatility in all firms, except for ACCESS Bank. The response of stock returns to oil impact is negative in the case of FIRST Bank, UBA and WEMA Bank and positive for GUARANTY Trust Bank, UNION Bank and ACCESS Bank. In the Oil & Gas sector on the other hand, we found that innovations in the oil market had effects on the stock volatility in three firms (BOCGAS, CONOIL and OANDO). The largest response to oil effects was observed in the case of CONOIL followed by BOCGAS. Overall, our findings showed that direct volatility transmission is insignificant for each pair of oil firms, because the volatility transmission runs more often from oil market to firms than from the firms to oil market. Considering the intensity of volatility spillover, it seems to vary from sector to sector, depending especially on their degree of oil dependence and industrial characteristics. The impact has a direct link in the Oil & Gas sector, while in the Banking sector the impact is indirectly linked. This suggests that investors should closely watch the happenings in the oil market to have better forecasts of stock market volatility and make appropriate investment decisions.