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On the reactions of sectoral equity returns to oil price in France: Implications for portfolio allocation

Listed author(s):
  • Bouoiyour, Jamal
  • Selmi, Refk
  • Miftah, Amal

Instead of conducting overall stock market index analysis, this paper focuses on the reactions of sectoral equity returns (Industrials, Financials and Banks, Health care, Information Technology, Consumer goods, Materials, Oil and Gas, Telecommunications) to oil price changes in France. From a methodological perspective, this study uses a new method, called the quantile-on-quantile (QQ) approach. Even though this technique is based on the quantile regression paradigm, it departs from the conventional framework as the exogenous variable may be itself a quantile. It allows looking further into hidden factors driving the link between oil price and stock returns which the standard econometric methods are unsuitable to accommodate. QQ views the nature and sensitivity of the stock returns responses to oil price shocks change greatly across sectors of activity and tail distributions. Specifically, Industrials, Materials, and Oil and Gas equities are typically more reactive towards oil price shocks. The response of Financials and Banks is relatively weak, while it appears negligible for Health care, Information Technology, Consumer goods and Telecommunications. The frequency domain causality test (relying on signal theory) has demonstrated its functionality and adequacy in this exercise. On the basis of this article’ outcomes, market participants could enhance the risk-adjusted return of their portfolios by pursuing a sector-based portfolio investment strategy. Also, introducing oil asset into a diversified portfolio of stocks enables to invigorate its risk-return features.

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File URL: https://mpra.ub.uni-muenchen.de/70382/1/MPRA_paper_70382.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 70382.

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Date of creation: 28 Mar 2016
Handle: RePEc:pra:mprapa:70382
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  3. 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.
  4. Broadstock, David C. & Filis, George, 2014. "Oil price shocks and stock market returns: New evidence from the United States and China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 417-433.
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