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

Sanusi, Muhammad Surajo; Ahmad, Farooq

Authors

Muhammad Surajo Sanusi

Farooq Ahmad



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.

Journal Article Type Article
Publication Date Aug 31, 2016
Journal Finance research letters
Print ISSN 1544-6123
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 18
Pages 89-99
Institution Citation SANUSI, M.S. and AHMAD, F. 2016. Modelling oil and gas stock returns using multi factor asset pricing model including oil price exposure. Finance research letters [online], 18, pages 89-99. Available from: https://doi.org/10.1016/j.frl.2016.04.005
DOI https://doi.org/10.1016/j.frl.2016.04.005
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

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