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Do investors price industry risk? Evidence from the cross-section of the oil industry

Ramos, S.B.; Taamouti, A.; Veiga, H.; Wang, C.-W.

Authors

S.B. Ramos

H. Veiga

C.-W. Wang



Abstract

Recent research identifies several industry-related patterns that standard asset pricing models cannot explain effectively. This paper investigates what explains the cross-section of returns of firms in the oil industry and, in particular, how well an oil factor performs in comparison with the common systematic factors identified in the literature. We conduct a time series analysis and demonstrate that the oil factor has substantial explanatory power over traditional factors. A cross-sectional regression shows that the size, momentum and oil factors are associated with a positive risk premium and are able to explain the cross-sectional variation in stock returns in the oil industry. Our results suggest that investors demand compensation for the exposure to oil price changes, which has implications for the computation of the cost of equity.

Citation

Ramos, S., Taamouti, A., Veiga, H., & Wang, C. (2017). Do investors price industry risk? Evidence from the cross-section of the oil industry. Journal of Energy Markets, 10(1), 79-108. https://doi.org/10.21314/jem.2017.156

Journal Article Type Article
Acceptance Date Aug 19, 2016
Online Publication Date Jan 18, 2017
Publication Date Mar 1, 2017
Deposit Date Aug 25, 2016
Journal Journal of Energy Markets
Print ISSN 1756-3607
Electronic ISSN 1756-3615
Publisher Infopro Digital Services
Peer Reviewed Peer Reviewed
Volume 10
Issue 1
Pages 79-108
DOI https://doi.org/10.21314/jem.2017.156
Public URL https://durham-repository.worktribe.com/output/1398453

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