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Valuation in the energy sector: Fundamentals or bubbles?

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  • Ramos, Sofía
  • Lopes Moreira Da Veiga, María Helena
  • Huang, I-Chuan

Abstract

We analyze valuation in the energy sector using the present value model as a framework.Using a panel sample of sector indexes and firms from Canada, Japan, the United Kingdom,and the United States, we find only weak evidence that prices follow the fundamentals foroil explorers and producers subsector. A variance decomposition analysis shows that mostlyshocks in discount rates, seen as investor sentiment changes and not changes in cash flows,affect valuation. Further tests detect explosive bubbles on the exploration and productionsector in the United Kingdom and in integrated subsector for Canada in the late 1990'sand around 2005 that are driven by high prices. Overall, results cast doubt on the role offundamentals and favor more the importance of bubbles in driving valuation.

Suggested Citation

  • Ramos, Sofía & Lopes Moreira Da Veiga, María Helena & Huang, I-Chuan, 2020. "Valuation in the energy sector: Fundamentals or bubbles?," DES - Working Papers. Statistics and Econometrics. WS 31056, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:31056
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    Keywords

    Bubbles;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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