Oil and stock market momentum
Chiao-Ming Cheng and
Riza Demirer ()
Energy Economics, 2017, vol. 68, issue C, 151-159
This study provides a novel perspective to the oil-stock market nexus by examining the predictive ability of oil return and volatility on stock market momentum in China. We find that oil return volatility serves as a strong predictor of industry momentum, even after controlling for stock market state, volatility and key macroeconomic variables. We argue that the predictive ability of oil over momentum payoffs is driven by time-varying investor sentiment that relates to excess buying pressure on winner stocks during uncertain times, captured by oil return volatility. Our tests also show that an oil-based momentum strategy wherein the investor conditions the trade on the state of oil return volatility yields significant abnormal returns, more than double that could be obtained from the conventional momentum strategy. In short, the findings suggest that oil market dynamics can contribute to stock market inefficiencies in such a way that these inefficiencies create significant abnormal profits for active managers.
Keywords: Industry momentum; Crude oil; Market efficiency; Chinese stock market (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:68:y:2017:i:c:p:151-159
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