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The direct and indirect e ects of oil shocks on energy related stocks

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  • David C Broadstock

    ()
    (TIERS, Southwestern University of Finance and Economics, China and Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey, UK.)

  • Rui Wang

    (TIERS, Southwestern University of Finance and Economics, China)

  • Dayong Zhang

    (TIERS, Southwestern University of Finance and Economics, China)

Abstract

We attempt to consolidate (at least in part) the vast literature on oil shocks and stock returns by decomposing the influence of oil shocks into two channels of effect: ‘direct’ and ‘indirect’. Using a simple empirical asset pricing model it is shown that oil shocks can affect stocks not only directly, but also indirectly through general market risk (which is shown to be due in part to oil shocks), or put another way that additional oil price risk exposure is embedded in the traditional market beta. As far as is known, this is the first paper explicitly quantifying both effects together. By doing so we offer a more complete picture of when and how oil shocks impact stock returns, thus allowing investors to make more informed responses to oil shocks. The results are illustrated using daily data from all (active) listed energy related stock portfolios in the Asia Pacific Region, and are robust to structural instability and the specification of oil-shock used.

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Bibliographic Info

Paper provided by Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey in its series Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) with number 146.

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Length: 38 pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:sur:seedps:146

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Keywords: Oil Prices; Energy Related Stocks; Threshold GARCH; Asset Pricing; Structural Break.;

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