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Oil Risk in Oil Stocks

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  • Bert Scholtens
  • Lei Wang

Abstract

We assess the oil price sensitivities and oil risk premiums of NYSE listed oil & gas firms returns by using a two-step regression analysis under two different arbitrage pricing models. Thus, we apply the Fama and French (1992) factor returns in a study of oil stocks. In all, we find that the return of oil stocks is positively associated with the return of the market, the increase of the spot crude oil price, and negatively with the firmÕs book-to-market ratio. The oil firms sensitivities to the market, the oil price and the book-to-market ratio are positively priced by the market under the integrated model. However, both the size and significance of the oil risk premium are unstable. This suggests that increases in the oil price impact on expectations about the oil stocksÕ future return. The positive oil risk premium may disappear as investors change their perception of the effect of oil price changes on stock returns.

Suggested Citation

  • Bert Scholtens & Lei Wang, 2008. "Oil Risk in Oil Stocks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 89-112.
    • Handle: RePEc:aen:journl:2008v29-01-a05
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    JEL classification:

    • F0 - International Economics - - General

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