Co-Movement Between Crude Oil Returns and African Stock Market Returns: The Role of Investors‘ Sentiment

Abstract

Financial markets are integrated and are continually experiencing asymmetry. With market integrations, investors have capitalised on commodities to diversify against risks. There are extensive findings showing the connectedness of financial assets and commodities. This relationship however has also been proven to be asymmetric probably based on investors‘ sentiments. As such, this study sought to explore the role of investor sentiment (VIX and OVX) on the relationship between crude oil returns and 15 African stock market returns using daily data from January 12, 2012 to August 3, 2023. To answer the research objectives, a post-positivist philosophy, quantitative approach and explanatory design were adopted consequently. Because of the asymmetric nature of investors, the bi-wavelet and partial wavelet analyses were adopted to explore the time-frequency nature of such a relationship. The study revealed a strong integration between crude oil prices and African stock markets, where changes in oil returns significantly impacted market performance. Investor sentiment played a key role, with positive sentiment amplifying gains during rising oil prices and negative sentiment intensifying losses during declines. The relationship was found to be varying and asymmetric over time, affecting countries differently based on their oil dependency. Oil-exporting nations experienced more direct benefits, while oil-importing countries faced negative impacts, especially in energy-reliant sectors. Given the multifaceted interactions between investor sentiment, crude oil returns, and stock returns in African markets, it is essential for investors, policymakers, and market participants to take a comprehensive approach that combines both financial and behavioural perspectives.