Modelling the oil price volatility and macroeconomic variables in South Africa using the symmetric and asymmetric GARCH models

Abstract

This article employed the ARCH, GARCH and EGARCH models to model the oil price volatility and macroeconomic variables in South Africa for the period 1990Q1 to 2018Q2. The macroeconomic variables used in the study are GDP, inflation, interest rate and exchange rates. According to ARCH (1) and GARCH (1, 1) models, exchange rate and interest rate have a negative effect on the oil price, while GDP and inflation suggesting a positive effect. The results for GDP and inflation imply that a 1% increase in GDP and inflation may lead to an increase in oil price. The negative effect on interest rate and exchange rate led by their negative values implies that a 1% increase in interest rate and exchange rate may lead to a decrease in oil price. The EGARCH (1, 1) model revealed that oil price is negatively affected by all the macroeconomic variables. This implies that a 1% increase in these variables may lead to a decrease in oil price. The symmetric and asymmetric techniques revealed that the South African oil prices are volatile. The article recommends that South African policy makers should have a view on the impact of oil price volatility on the South African economy.