U.S. industry-level returns and oil prices

Qinbin Fan and Mohammad Jahan-Parvar

International Review of Economics & Finance, 2012, vol. 22, issue 1, 112-128

Abstract: This paper empirically investigates and provides further support for the oil price effect documented in Driesprong et al. (2008) in the U.S. industry-level returns. We find that oil price predictability is concentrated in a relatively small number of industry-level returns, the relevant measure for a study of the oil effect is percentage change in oil spot prices, and changes in oil futures prices have virtually no prediction power for industry-level returns. With percentage changes in oil spot prices as the predictor, approximately one fifth of industry returns are oil-predictable. We detect a two trading weeks delay in reaction to oil price changes which is consistent with the Hong and Stein (1996) underreaction hypothesis. These results are robust to various alternative specifications, and are shown to be unrelated to time-varying risk premia. Moreover, we demonstrate that trading strategies based on the oil effect generate superior gains in comparison with buy-and-hold strategy in the presence of reasonable trading costs.

Keywords: Industry-level returns; Market efficiency; Oil prices; Return predictability; Underreaction (search for similar items in EconPapers)
JEL-codes: G11 G14 G17 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Working Paper: US Industry-Level Returns and Oil Prices (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:22:y:2012:i:1:p:112-128

DOI: 10.1016/j.iref.2011.09.004

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