Abstract

http://ssrn.com/abstract=2058558
 
 

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Estimating Oil Risk Factors Using Information from Equity and Derivatives Markets


I-Hsuan Ethan Chiang


University of North Carolina (UNC) at Charlotte

W. Keener Hughen


University of North Carolina (UNC) at Charlotte

Jacob S. Sagi


University of North Carolina Kenan-Flagler Business School

November 18, 2013

Journal of Finance, Forthcoming

Abstract:     
We introduce a novel approach to estimating latent oil risk factors and establish their significance in pricing non-oil securities. Our model, which features four factors with simple economic interpretations, is estimated using both derivative prices and oil-related equity returns. The fit is excellent in and out of sample. The extracted oil factors carry significant risk premia, and are significantly related to macroeconomic variables as well as portfolio returns sorted on characteristics and industry. The average non-oil portfolio exhibits a sensitivity to the oil factors amounting to a sixth (in magnitude) of that of the oil industry itself.

Number of Pages in PDF File: 52

Keywords: Oil, futures, asset pricing, APT, real options, CAPM, Fama-French factors, Markov chain Monte Carlo

JEL Classification: G12, G13

Accepted Paper Series


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Date posted: May 14, 2012 ; Last revised: December 13, 2013

Suggested Citation

Chiang, I-Hsuan Ethan and Hughen, W. Keener and Sagi, Jacob S., Estimating Oil Risk Factors Using Information from Equity and Derivatives Markets (November 18, 2013). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2058558 or http://dx.doi.org/10.2139/ssrn.2058558

Contact Information

I-Hsuan Ethan Chiang
University of North Carolina (UNC) at Charlotte ( email )
9201 University City Boulevard
Charlotte, NC 28223
United States
W. Keener Hughen
University of North Carolina (UNC) at Charlotte ( email )
9201 University City Boulevard
Charlotte, NC 28223
United States
Jacob Sagi (Contact Author)
University of North Carolina Kenan-Flagler Business School ( email )
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/sagij/

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