A firm-level analysis of the upstream-downstream dichotomy in the oil-stock nexus

Raymond Swaray and Afees Salisu

Global Finance Journal, 2018, vol. 37, issue C, 199-218

Abstract: In this paper, we query whether the stock prices of nonintegrated firms in the upstream and downstream sectors of the global oil supply chain respond symmetrically to changes in oil prices. This inquiry relates to the “homogenous expectation” assumption among investors and fund managers pertaining to the returns and variances of assets of specialized firms operating in upstream and downstream sectors of the supply chain. Motivated by the Arbitrage Pricing Theory, we formulate a Panel Autoregressive Distributed Lag (PARDL) model, which explains the possible macroeconomic factors in the oil-stock nexus as well as any inherent persistence and heterogeneity effects due to large cross-sections and time. In accordance with the Shin, Yu, and Greenwood-Nimmo (2014) approach, a Nonlinear Panel ARDL model is also formulated to test for possible asymmetric responses of the nonintegrated oil firms to positive and negative changes in the oil price. Our findings indicate that the stock prices of upstream and downstream firms move in contrasting directions in response to changes in the benchmark crude oil prices in the long-run. Specifically, we show that the stock prices of upstream sector firms increased in response to an increase in oil prices, while the reverse holds for the stock prices of downstream firms. In the short run, returns on the stock of firms in both sectors increase following an increase in oil prices; however, downstream firms' stock returns decreased in response to negative oil price shocks. The findings further show that both sectors respond differently to episodic changes in market conditions that emanated from the global financial crisis. However, upstream firms show a stronger response to changing market conditions than their downstream counterparts.

Keywords: Stock price; Crude oil price; Price transmission; Portfolio management (search for similar items in EconPapers)
JEL-codes: C23 F41 G11 G12 Q43 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1044028318300553
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:glofin:v:37:y:2018:i:c:p:199-218

DOI: 10.1016/j.gfj.2018.05.007

Access Statistics for this article

Global Finance Journal is currently edited by Manuchehr Shahrokhi

More articles in Global Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().