IDEAS home Printed from https://ideas.repec.org/a/eee/jrpoli/v68y2020ics0301420720301057.html
   My bibliography  Save this article

Predicting stock returns using crude oil prices: A firm level analysis of Nigeria's oil and gas sector

Author

Listed:
  • Adekunle, Wasiu
  • Bagudo, Abubakar M.
  • Odumosu, Monsuru
  • Inuolaji, Suraj B.

Abstract

The decision over asset holding is traditionally premised on the double-edge objective of returns maximization and risk minimization. While the class of assets held by a typical investor depends on his attitude towards risks, an optimal investment portfolio requires a strategic combination of alternative assets (commodities, T-bills, stocks etc). To this end, our paper analyzes the role of crude oil prices in predicting stock returns, in addition to the traditional factors, particularly the returns on risk-free assets (such as, T-bills) as enunciated by the Capital Asset Pricing Model (CAPM). We also consider the possibility of nonlinearities in the nexus between crude oil prices and stock returns of nine major oil and gas companies that are currently listed on the Nigerian Stock Exchange over the period of January 2014 to November 2019. Our results show significant in-sample predictability of stock returns using crude oil prices, thereby affirming our argument that oil price matters in the predictability of stock returns for some listed oil and gas firms in Nigeria. We also offer evidence for the role of asymmetries in the predictability of stock returns for the majority of the listed oil and gas companies in Nigeria. By implication, the increasing exposure of the earnings, vis-à-vis, the share prices of some major oil and gas companies to negative changes in global oil prices suggests the need for diversification of their scope of operations.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:jrpoli:v:68:y:2020:i:c:s0301420720301057
    DOI: 10.1016/j.resourpol.2020.101708
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301420720301057
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.resourpol.2020.101708?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    2. Caporale, Guglielmo Maria & Menla Ali, Faek & Spagnolo, Nicola, 2015. "Oil price uncertainty and sectoral stock returns in China: A time-varying approach," China Economic Review, Elsevier, vol. 34(C), pages 311-321.
    3. Bagirov, Miramir & Mateus, Cesario, 2019. "Oil prices, stock markets and firm performance: Evidence from Europe," International Review of Economics & Finance, Elsevier, vol. 61(C), pages 270-288.
    4. Kang, Wensheng & Ratti, Ronald A. & Vespignani, Joaquin, 2016. "The impact of oil price shocks on the U.S. stock market: A note on the roles of U.S. and non-U.S. oil production," Economics Letters, Elsevier, vol. 145(C), pages 176-181.
    5. Basher, Syed A. & Sadorsky, Perry, 2006. "Oil price risk and emerging stock markets," Global Finance Journal, Elsevier, vol. 17(2), pages 224-251, December.
    6. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2012. "Oil prices, exchange rates and emerging stock markets," Energy Economics, Elsevier, vol. 34(1), pages 227-240.
    7. Bouri, Elie & Awartani, Basel & Maghyereh, Aktham, 2016. "Crude oil prices and sectoral stock returns in Jordan around the Arab uprisings of 2010," Energy Economics, Elsevier, vol. 56(C), pages 205-214.
    8. John Y. Campbell, 2008. "Viewpoint: Estimating the equity premium," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(1), pages 1-21, February.
    9. Kang, Wensheng & Ratti, Ronald A. & Yoon, Kyung Hwan, 2015. "Time-varying effect of oil market shocks on the stock market," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 150-163.
    10. Westerlund, Joakim & Narayan, Paresh Kumar, 2012. "Does the choice of estimator matter when forecasting returns?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2632-2640.
    11. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    12. Narayan, Paresh Kumar & Gupta, Rangan, 2015. "Has oil price predicted stock returns for over a century?," Energy Economics, Elsevier, vol. 48(C), pages 18-23.
    13. Musibau Adetunji Babatunde & Olayinka Adenikinju & Adeola F. Adenikinju, 2013. "Oil price shocks and stock market behaviour in Nigeria," Journal of Economic Studies, Emerald Group Publishing, vol. 40(2), pages 180-202, March.
    14. Chang, Kuang-Liang & Yu, Shih-Ti, 2013. "Does crude oil price play an important role in explaining stock return behavior?," Energy Economics, Elsevier, vol. 39(C), pages 159-168.
    15. Gupta, Kartick, 2016. "Oil price shocks, competition, and oil & gas stock returns — Global evidence," Energy Economics, Elsevier, vol. 57(C), pages 140-153.
    16. Narayan, Paresh Kumar & Sharma, Susan Sunila, 2011. "New evidence on oil price and firm returns," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3253-3262.
    17. Lutz Kilian & Cheolbeom Park, 2009. "The Impact Of Oil Price Shocks On The U.S. Stock Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1267-1287, November.
    18. Swaray, Raymond & Salisu, Afees A., 2018. "A firm-level analysis of the upstream-downstream dichotomy in the oil-stock nexus," Global Finance Journal, Elsevier, vol. 37(C), pages 199-218.
    19. 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.
    20. Simeon Ebechidi & Eleanya K. Nduka, 2017. "Modeling the Impact of Oil Price Shocks on Energy Sector Stock Returns: Evidence from Nigeria," Economics Bulletin, AccessEcon, vol. 37(4), pages 2574-2584.
    21. Jouini, Jamel, 2013. "Return and volatility interaction between oil prices and stock markets in Saudi Arabia," Journal of Policy Modeling, Elsevier, vol. 35(6), pages 1124-1144.
    22. Musibau Adetunji Babatunde & Olayinka Adenikinju & Adeola F. Adenikinju, 2013. "Oil price shocks and stock market behaviour in Nigeria," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(2), pages 180-202, May.
    23. Zhu, Fan & Jin, Faqi & Wu, Haiquan & Wen, Fenghua, 2019. "The impact of oil price changes on stock returns of new energy industry in China: A firm-level analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 532(C).
    24. Ding, Haoyuan & Kim, Hyung-Gun & Park, Sung Y., 2016. "Crude oil and stock markets: Causal relationships in tails?," Energy Economics, Elsevier, vol. 59(C), pages 58-69.
    25. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, vol. 74(2), pages 209-235, November.
    26. John Y. Campbell, 2007. "Estimating the Equity Premium," NBER Working Papers 13423, National Bureau of Economic Research, Inc.
    27. Salisu, Afees A. & Swaray, Raymond & Oloko, Tirimisiyu F., 2019. "Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables," Economic Modelling, Elsevier, vol. 76(C), pages 153-171.
    28. Jones, Charles M & Kaul, Gautam, 1996. "Oil and the Stock Markets," Journal of Finance, American Finance Association, vol. 51(2), pages 463-491, June.
    29. Nsisong Patrick Ekong & Daniel Wilson Ebong, 2016. "On the Crude Oil Price, Stock Market Movement and Economic Growth Nexus in Nigeria Evidence from Cointegration and Var Analysis," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 4(3), pages 112-123, September.
    30. Aloui, Chaker & Nguyen, Duc Khuong & Njeh, Hassen, 2012. "Assessing the impacts of oil price fluctuations on stock returns in emerging markets," Economic Modelling, Elsevier, vol. 29(6), pages 2686-2695.
    31. Salisu, Afees A. & Isah, Kazeem O. & Raheem, Ibrahim D., 2019. "Testing the predictability of commodity prices in stock returns of G7 countries: Evidence from a new approach," Resources Policy, Elsevier, vol. 64(C).
    32. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    33. Nsisong Patrick Ekong & Daniel Wilson Ebong, 2016. "On the Crude Oil Price, Stock Market Movement and Economic Growth Nexus in Nigeria Evidence from Cointegration and Var Analysis," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 4(3), pages 112-123.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Navarre, Jeremy T. & Frazier, Jeremy A., 2022. "Econometric analysis of factors influencing commercial helicopter operators’ stock returns in the gulf of Mexico," Journal of Air Transport Management, Elsevier, vol. 99(C).
    2. Pande Ketut Rheynaldi & Endri Endri & Minanari Minanari & Putri Andari Ferranti & Subur Karyatun, 2023. "Energy Price and Stock Return: Evidence of Energy Sector Companies in Indonesia," International Journal of Energy Economics and Policy, Econjournals, vol. 13(5), pages 31-36, September.
    3. Emmanuel Uche & Lionel Effiom, 2021. "Oil price, exchange rate and stock price in Nigeria: Fresh insights based on quantile ARDL model," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2021(1), pages 59-79.
    4. Yan Ding & Yue Liu & Pierre Failler, 2022. "The Impact of Uncertainties on Crude Oil Prices: Based on a Quantile-on-Quantile Method," Energies, MDPI, vol. 15(10), pages 1-35, May.
    5. Kassouri, Yacouba & Altıntaş, Halil, 2022. "The quantile dependence of the stock returns of “clean” and “dirty” firms on oil demand and supply shocks," Journal of Commodity Markets, Elsevier, vol. 28(C).
    6. Yanqiong Liu & Zhenghui Li & Yanyan Yao & Hao Dong, 2021. "Asymmetry of Risk Evolution in Crude Oil Market: From the Perspective of Dual Attributes of Oil," Energies, MDPI, vol. 14(13), pages 1-22, July.
    7. Sun, Guanglin & Li, Jianfeng & Shang, Zezhong, 2022. "Return and volatility linkages between international energy markets and Chinese commodity market," Technological Forecasting and Social Change, Elsevier, vol. 179(C).
    8. Hashmi, Shabir Mohsin & Chang, Bisharat Hussain & Huang, Liangfang & Uche, Emmanuel, 2022. "Revisiting the relationship between oil prices, exchange rate, and stock prices: An application of quantile ARDL model," Resources Policy, Elsevier, vol. 75(C).
    9. Henry Okodua & Ese Urhie & Moses Akpesiri Erhi & Christiana Onyohu Hassan & Eyitemi Ayomikun Fasanu, 2022. "Oil Price Volatility and Equity Valuation of Listed Energy Companies in Nigeria: A Panel ARDL Model," International Journal of Energy Economics and Policy, Econjournals, vol. 12(5), pages 482-490, September.
    10. Jassim Aladwani, 2023. "Wavelet Coherence and Continuous Wavelet Transform - Implementation and Application to the Relationship between Exchange Rate and Oil Price for Importing and Exporting Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 13(4), pages 531-541, July.
    11. Adekoya, Oluwasegun B. & Ogunbowale, Gideon O. & Akinseye, Ademola B. & Oduyemi, Gabriel O., 2021. "Improving the predictability of stock returns with global financial cycle and oil price in oil-exporting African countries," International Economics, Elsevier, vol. 168(C), pages 166-181.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Smyth, Russell & Narayan, Paresh Kumar, 2018. "What do we know about oil prices and stock returns?," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 148-156.
    2. Salisu, Afees A. & Swaray, Raymond & Oloko, Tirimisiyu F., 2019. "Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables," Economic Modelling, Elsevier, vol. 76(C), pages 153-171.
    3. Salisu, Afees A. & Isah, Kazeem O., 2017. "Revisiting the oil price and stock market nexus: A nonlinear Panel ARDL approach," Economic Modelling, Elsevier, vol. 66(C), pages 258-271.
    4. Hadhri, Sinda, 2021. "The nexus, downside risk and asset allocation between oil and Islamic stock markets: A cross-country analysis," Energy Economics, Elsevier, vol. 101(C).
    5. Stavros Degiannakis, George Filis, and Vipin Arora, 2018. "Oil Prices and Stock Markets: A Review of the Theory and Empirical Evidence," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    6. Babak Fazelabdolabadi, 2019. "Uncertainty and energy-sector equity returns in Iran: a Bayesian and quasi-Monte Carlo time-varying analysis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 5(1), pages 1-20, December.
    7. Adekoya, Oluwasegun B. & Ogunbowale, Gideon O. & Akinseye, Ademola B. & Oduyemi, Gabriel O., 2021. "Improving the predictability of stock returns with global financial cycle and oil price in oil-exporting African countries," International Economics, Elsevier, vol. 168(C), pages 166-181.
    8. Mishra, Shekhar & Mishra, Sibanjan, 2021. "Are Indian sectoral indices oil shock prone? An empirical evaluation," Resources Policy, Elsevier, vol. 70(C).
    9. Salisu, Afees A. & Raheem, Ibrahim D. & Ndako, Umar B., 2019. "A sectoral analysis of asymmetric nexus between oil price and stock returns," International Review of Economics & Finance, Elsevier, vol. 61(C), pages 241-259.
    10. Naeem, Muhammad Abubakr & Balli, Faruk & Shahzad, Syed Jawad Hussain & de Bruin, Anne, 2020. "Energy commodity uncertainties and the systematic risk of US industries," Energy Economics, Elsevier, vol. 85(C).
    11. Silvapulle, Param & Smyth, Russell & Zhang, Xibin & Fenech, Jean-Pierre, 2017. "Nonparametric panel data model for crude oil and stock market prices in net oil importing countries," Energy Economics, Elsevier, vol. 67(C), pages 255-267.
    12. Nonejad, Nima, 2018. "Déjà vol oil? Predicting S&P 500 equity premium using crude oil price volatility: Evidence from old and recent time-series data," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 260-270.
    13. Bahmani-Oskooee, Mohsen & Ghodsi, Seyed Hesam & Hadzic, Muris, 2019. "Asymmetric causality between oil price and stock returns:A sectoral analysis," Economic Analysis and Policy, Elsevier, vol. 63(C), pages 165-174.
    14. Pal, Debdatta & Mitra, Subrata K., 2019. "Oil price and automobile stock return co-movement: A wavelet coherence analysis," Economic Modelling, Elsevier, vol. 76(C), pages 172-181.
    15. Balakumar, Suganya & Dash, Saumya Ranjan & Maitra, Debasish & Kang, Sang Hoon, 2022. "Do oil price shocks have any implications for stock return momentum?," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 637-663.
    16. Salisu, Afees A. & Adekunle, Wasiu & Alimi, Wasiu A. & Emmanuel, Zachariah, 2019. "Predicting exchange rate with commodity prices: New evidence from Westerlund and Narayan (2015) estimator with structural breaks and asymmetries," Resources Policy, Elsevier, vol. 62(C), pages 33-56.
    17. Phan, Dinh Hoang Bach & Sharma, Susan Sunila & Narayan, Paresh Kumar, 2015. "Stock return forecasting: Some new evidence," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 38-51.
    18. Mushtaq Hussain Khan & Junaid Ahmed & Mazhar Mughal & Imtiaz Hussain Khan, 2023. "Oil price volatility and stock returns: Evidence from three oil‐price wars," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 3162-3182, July.
    19. Xiao, Jihong & Zhou, Min & Wen, Fengming & Wen, Fenghua, 2018. "Asymmetric impacts of oil price uncertainty on Chinese stock returns under different market conditions: Evidence from oil volatility index," Energy Economics, Elsevier, vol. 74(C), pages 777-786.
    20. Kristjanpoller, Werner D. & Concha, Diego, 2016. "Impact of fuel price fluctuations on airline stock returns," Applied Energy, Elsevier, vol. 178(C), pages 496-504.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jrpoli:v:68:y:2020:i:c:s0301420720301057. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30467 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.