Can the skewness of oil returns affect stock returns? Evidence from China’s A-Share markets

Xuan Mo, Zhi Su and Libo Yin ()

The North American Journal of Economics and Finance, 2019, vol. 50, issue C

Abstract: Crude oil is an influential commodity in the real economy and stock markets of the world. However, the literature focuses exclusively on using the first or second moment of oil prices and ignores the information content in higher order moments. Our paper addresses this gap by investigating the relationship between the skewness of oil returns and expected stock returns in China’s A-share market. We find that the relationship between the skewness of oil returns and expected stock returns is significantly negative. This finding is robust even after considering firm characteristics, lagged oil returns, different energy dependencies, and changes in the supply and demand of oil, and is sustained across industries. This negative relationship can be interpreted as investors’ preference for skewness. Investors tend to overweight the tails of positively skewed oil returns to capture lottery-like payoffs, leading to net long positions and overpricing, which in turn lead to negative average returns. We also find that there are structural patterns for the relationship between the skewness of oil returns and expected stock returns. The negative relationship only exists in falling stock markets and changes under extremely low volatility.

Keywords: Skewness of oil returns; Expected stock returns; Investor preference (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940819301007
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:50:y:2019:i:c:s1062940819301007

DOI: 10.1016/j.najef.2019.101042

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().