The impact of crude oil prices on stock prices of oil firms: Should upstream-downstream dichotomy in supply chain be ignored?

Raymond Swaray (r.swaray@hull.ac.uk) and Afees Salisu
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Raymond Swaray: Economics Subject Group, University of Hull Business, University of Hull, Cottingham Road, UK

No 21, Working Papers from Centre for Econometric and Allied Research, University of Ibadan

Abstract: In this paper, we query whether stock prices of non-integrated firms in upstream and downstream sectors of global oil supply chain respond similarly to changes in oil prices. This enquiry relates to “homogenous expectation†assumption among investors and fund managers pertaining to returns and variances of assets of specialized firms operating in upstream and downstream sectors of the supply chain. Using theoretical framework underpinned by the arbitrage pricing theory in conjunction with heterogeneous panel ARDL regression models, we find that stock prices of upstream and downstream firms move in contrasting directions in response to changes in benchmark crude oil prices in the long-run. Specifically, we show that stock prices of upstream sector firms increased in response to increase in oil prices, while the reverse holds for stock prices of downstream firms. In the short run, returns on stock of firms in both sectors increase following increase in oil prices; but downstream firms stock returns decreased in response to negative oil price shocks. Findings further show that both sectors respond differently to episodic changes in market conditions which emanated from the global financial crisis. However, upstream firms show stronger response to changing market conditions than their downstream counterparts.

Keywords: Oil price; 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)
Pages: 51 pages
Date: 2017-08
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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