Do oil price shocks drive systematic risk premia in stock markets? A novel investment application

Riza Demirer, Onur Polat and Amin Sokhanvar

Research in International Business and Finance, 2025, vol. 73, issue PA

Abstract: This paper examines the effect of oil price shocks on factor returns in a set of 62 stock markets. Oil price shocks capture significant predictive information regarding the size and direction of factor returns in global markets, depending on the market classification and nature of oil shock. Oil supply and precautionary demand shocks possess the greatest predictive power over risk premia, particularly for value and momentum. We argue that time varying investor sentiment and the flexibility of firms to respond to economic shocks drive the responses of factors to oil shocks. More importantly, a conditional global factor investing strategy wherein the investment positions are tilted towards factor-based portfolios, conditional on the size and direction of the oil price shock, yields significant improvements in returns. Our findings show that smart beta strategies can be significantly improved by conditioning factor positions based on the size and direction of oil market shocks.

Keywords: Oil price shocks; Equity market; Risk premia; Factor investing (search for similar items in EconPapers)
JEL-codes: C58 G11 G12 Q40 (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0275531924003842
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:riibaf:v:73:y:2025:i:pa:s0275531924003842

DOI: 10.1016/j.ribaf.2024.102591

Access Statistics for this article

Research in International Business and Finance is currently edited by T. Lagoarde Segot

More articles in Research in International Business and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().