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Modelling oil and gas stock returns using multi factor asset pricing model including oil price exposure

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  • Sanusi, Muhammad Surajo
  • Ahmad, Farooq

Abstract

Oil and gas is one of the most important sectors in every economy and the valuation of oil and gas companies becomes quite challenging due to the volatility of crude oil price. The paper investigates the determinants of the UK oil and gas stock returns using multi factor asset pricing model and the existence of asymmetric effects in the Brent crude oil price. Our results show that market risk, oil price risk, size and book-to-market related factors are all relevant in the determination of asset returns of the oil and gas companies quoted on the London stock exchange. Oil price increases and decreases decomposed separately have more effect on the oil companies’ stock returns than the normal log changes of the price which show the presence of asymmetric effect. However, the oil price shocks in general do not seem to strongly affect stock returns in oil and gas sector possibly due to horizontal and vertical integration of bigger companies in the sector.

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  • Sanusi, Muhammad Surajo & Ahmad, Farooq, 2016. "Modelling oil and gas stock returns using multi factor asset pricing model including oil price exposure," Finance Research Letters, Elsevier, vol. 18(C), pages 89-99.
    • Handle: RePEc:eee:finlet:v:18:y:2016:i:c:p:89-99
    DOI: 10.1016/j.frl.2016.04.005
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    10. Mohamad Husam Helmi & A. Nazif Catik & Begum Yurteri Kosedagli & Gul Serife Huyuguzel Kisla & Coskun Akdeniz, 2023. "The Effects of Energy Prices on Oil-Gas Sectoral Stock Returns for BRIC Countries: Evidence from Space State Models," International Journal of Energy Economics and Policy, Econjournals, vol. 13(6), pages 430-440, November.
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    13. Mohmmad Enamul Hoque & Soo Wah Low & Mohd Azlan Shah Zaidi, 2020. "Do Oil and Gas Risk Factors Matter in the Malaysian Oil and Gas Industry? A Fama-MacBeth Two Stage Panel Regression Approach," Energies, MDPI, vol. 13(5), pages 1-15, March.
    14. Adekunle, Wasiu & Bagudo, Abubakar M. & Odumosu, Monsuru & Inuolaji, Suraj B., 2020. "Predicting stock returns using crude oil prices: A firm level analysis of Nigeria's oil and gas sector," Resources Policy, Elsevier, vol. 68(C).
    15. Wei, Lu & Li, Guowen & Zhu, Xiaoqian & Sun, Xiaolei & Li, Jianping, 2019. "Developing a hierarchical system for energy corporate risk factors based on textual risk disclosures," Energy Economics, Elsevier, vol. 80(C), pages 452-460.
    16. Batten, Jonathan A. & Ciner, Cetin & Lucey, Brian M., 2017. "The dynamic linkages between crude oil and natural gas markets," Energy Economics, Elsevier, vol. 62(C), pages 155-170.
    17. Gogolin, Fabian & Kearney, Fearghal & Lucey, Brian M. & Peat, Maurice & Vigne, Samuel A., 2018. "Uncovering long term relationships between oil prices and the economy: A time-varying cointegration analysis," Energy Economics, Elsevier, vol. 76(C), pages 584-593.
    18. Miroslava Zavadska & Lucía Morales & Joseph Coughlan, 2018. "The Lead–Lag Relationship between Oil Futures and Spot Prices—A Literature Review," IJFS, MDPI, vol. 6(4), pages 1-22, October.
    19. Muhammad Surajo Sanusi, 2017. "Investigating the sources of Black’s leverage effect in oil and gas stocks," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1318812-131, January.
    20. Mohammad Enamul Hoque & Soo-Wah Low & Mohd Azlan Shah Zaidi, 2020. "The Effects of Oil and Gas Risk Factors on Malaysian Oil and Gas Stock Returns: Do They Vary?," Energies, MDPI, vol. 13(15), pages 1-22, July.
    21. Luo, Xingguo & Qin, Shihua, 2017. "Oil price uncertainty and Chinese stock returns: New evidence from the oil volatility index," Finance Research Letters, Elsevier, vol. 20(C), pages 29-34.
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    23. Begüm Yurteri Kösedağlı & Gül Huyugüzel Kışla & A. Nazif Çatık, 2021. "The time-varying effects of oil prices on oil–gas stock returns of the fragile five countries," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-22, December.

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    More about this item

    Keywords

    Asset pricing model; Brent crude oil; Asymmetry in oil price; Size effect; Book to market ratio; Oil and gas sector; Oil price exposure; Structural breaks;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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