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

Sofia B. Ramos, Abderrahim Taamouti, Helena Veiga, Chih Wei Wang

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

Abstract

Recent research identifies several industry-related patterns that standard asset pricing models cannot explain effectively. This paper investigates what explains the crosssection 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.

Original languageEnglish
Pages (from-to)78-108
Number of pages31
JournalJournal of Energy Markets
Volume10
Issue number1
DOIs
StatePublished - Mar 2017

Keywords

  • Anomalies
  • Asset pricing
  • Cross-sectional tests
  • Oil industry
  • Oil prices
  • Time series tests

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