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

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.

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

• Journal Article Type: Article
• Acceptance Date: Apr 3, 2016
• Online Publication Date: Apr 9, 2016
• Publication Date: Aug 31, 2016
• Deposit Date: Apr 26, 2016
• Publicly Available Date: Apr 10, 2017
• Journal: Finance research letters
• Print ISSN: 1544-6123
• Electronic ISSN: 1544-6131
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 18
• Pages: 89-99
• 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
• Public URL: http://hdl.handle.net/10059/1451