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Market efficiency, volatility behaviour and asset pricing analysis of the oil & gas companies quoted on the London Stock Exchange.

Sanusi, Muhammad Surajo


Muhammad Surajo Sanusi


Linda Kirkham


This research assessed market efficiency, volatility behaviour, asset pricing, and oil price risk exposure of the oil and gas companies quoted on the London Stock Exchange with the aim of providing fresh evidence on the pricing dynamics in this sector. In market efficiency analysis, efficient market hypothesis (EMH) and random walk hypothesis were tested using a mix of statistical tools such as Autocorrelation Function, Ljung-Box Q-Statistics, Runs Test, Variance Ratio Test, and BDS test for independence. To confirm the results from these parametric and non-parametric tools, technical trading and filter rules, and moving average based rules were also employed to assess the possibility of making abnormal profit from the stocks under study. In seasonality analysis, stock returns were tested for the day-of-the-week and month-of-the-year effects. Volatility processes, estimation, and forecasting were undertaken using both asymmetric and symmetric volatility models such as GARCH (1,1) and Threshold ARCH or TARCH (1,1,1) to investigate the volatility behaviour of stock returns. To determine the effect of an exogenous variable on volatility, Brent crude oil price was used in the models formulated as a variance regressor for the assessment of its impact on volatility. The models were then used to forecast the price volatility taking note of the forecasting errors for the determination of the most effective forecasting model. International oil price risk exposure of the oil and gas sector was measured using a multi-factor asset pricing model similar to that developed by Fama and French (1993). Factors used in the asset pricing model are assessed for statistical significance and relevance in the pricing of oil and gas stocks. Data used in the study were mainly the adjusted daily closing prices of oil and gas companies quoted on the exchange. Five indices of FTSE All Share, FTSE 100, FTSE UK Oil and Gas, FTSE UK Oil and Gas Producers, and FTSE AIM SS Oil and Gas were also included in the analysis. Our findings suggest that technical trading rules cannot be used to gain abnormal returns, which could be regarded as a sign for weak form market efficiency. The results from seasonality analysis have not shown any day-of-the-week or monthly effect in stock returns. The pattern of stock returns volatility can be estimated and forecasted, although the relationship between risk and return cannot be generalised. On a similar note, the relationship between volatility attributes and the efficient market hypothesis cannot be clearly established. However, we have established that volatility modelling can significantly measure the quantum of risk in the oil and gas sector. Market risk, oil price risk, size and book-to-market related factors in asset pricing models were found to be relevant in the determination of asset prices of the oil and gas companies.


SANUSI, M.S. 2015. Market efficiency, volatility behaviour and asset pricing analysis of the oil & gas companies quoted on the London Stock Exchange. Robert Gordon University, PhD thesis.

Thesis Type Thesis
Deposit Date Jul 21, 2015
Publicly Available Date Jul 21, 2015
Keywords Information efficiency; Seasonality analysis; Volatility; Systematic risk; Asset pricing; Forecasting
Public URL
Award Date Jun 30, 2015


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