Oil price explosivity and stock return: Do sector and firm size matter?

Ozkan Haykir, Ibrahim Yagli, Emine Dilara Aktekin Gok and Hilal Budak

Resources Policy, 2022, vol. 78, issue C

Abstract: The paper examines whether the oil price series contains price explosivity and if price explosivity exists whether it offers excess return for oil-related, oil-substitute, and oil-user companies in US stock markets. Moreover, we investigate whether the size effect moderates the relationship between oil price explosivity and stock returns. We use monthly West Texas Intermediate crude oil prices between January 1986 and December 2019 and employ the Generalized Supremum Augmented Dickey-Fuller test to detect the price explosivity. Feasible Generalized Least Squares estimator is also implemented to capture the impact of oil price bubble on stock returns of US companies. The results indicate multiple episodes of price explosivity which mostly coincides with the 2008 financial crisis. The price explosivity leads to an excess return for oil-related companies; whereas, it negatively impacts oil-substitute and oil-user firms. However, the effect of oil price explosivity on stock returns is heterogeneous across size groups. The results provide key insightful information to policymakers and investors. Policymakers should prevent the occurrence of price explosivity to increase the efficiency of an oil futures market. Given the diverse impact of oil price explosivity on the stock return across sectors and sub-size groups, investors can maximize their profits by rebalancing their portfolio based on oil dependency and the firm's size.

Keywords: Price explosivity; Oil price; Excess return; US stock Markets (search for similar items in EconPapers)
JEL-codes: C15 E44 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:78:y:2022:i:c:s0301420722003373

DOI: 10.1016/j.resourpol.2022.102892

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