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Empirical evidence of news about future prospects in the risk-pricing of oil assets

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  • Kakeu, Johnson
  • Bouaddi, Mohammed

Abstract

This empirical paper investigates the relevance of long-run risks associated with uncertainty shocks to future growth prospects (news about future prospects) for explaining the risk-pricing of oil stocks. An econometric method that incorporates dynamic factor analysis is used for estimating the pricing equation of oil stocks. The results indicate that oil investors care about long-run risks associated with future growth prospects. Long-run risks account for almost half of the total risk-premium of oil stocks. Long-run risks associated with future growth prospects are significantly shaped by latent factors related to the labor market, the price indices, and financial markets. Moreover, our estimated model captures some historical events including the oil crisis of the seventies, the economic crisis of the mid-eighties, the stock market crash of 1987, and the economic crises of 1998 and 2000.

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  • Kakeu, Johnson & Bouaddi, Mohammed, 2017. "Empirical evidence of news about future prospects in the risk-pricing of oil assets," Energy Economics, Elsevier, vol. 64(C), pages 458-468.
    • Handle: RePEc:eee:eneeco:v:64:y:2017:i:c:p:458-468
    DOI: 10.1016/j.eneco.2015.10.018
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    1. Kakeu, Johnson & Nguimkeu, Pierre, 2017. "Habit formation and exhaustible resource risk-pricing," Energy Economics, Elsevier, vol. 64(C), pages 1-12.
    2. Johnson Kakeu, 2023. "Concerns for Long-Run Risks and Natural Resource Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 84(4), pages 1051-1093, April.

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    More about this item

    Keywords

    Oil stock; Long-run risks; Geopolitics of oil; Risk management; Future prospects; Stochastic recursive utility; Data-rich environment; Dynamic factor analysis;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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