Energy shocks pricing model: A non-linear US sectoral based analysis

Traditional asset pricing models have extensively been used; however, determining asset pricing in isolation in the current global environment demands for the inclusion of certain extraneous events. The goal of this study is to measure the impact of disintegrated structural oil shocks, proposed by Kilian (2009) on disaggregated US sectoral returns. Our work is motivated by the influence of global oil shocks on asset returns that are widely documented in the literature. Equity pricing data for nine major US sectors is used on monthly frequency. We apply non-linear Markov Regime Switching framework and report clear regime differences across all sectors. Commonality in behavior for majority of the sectoral returns is observed however consumer discretionary, materials and automobile sector remains sensitive in both regimes contrary to other sectors exhibiting sensitivity in one regime or the other. Results also present robust evidence of oil specific demand shocks implying more uncertainty for US sectoral returns with important investment and policy implication.