Oil price exposure and the cross section of stock returns

54 Pages Posted: 17 Apr 2018 Last revised: 31 Oct 2022

See all articles by Jordan Moore

Jordan Moore

Rowan University - Accounting & Finance

Mihail Velikov

Pennsylvania State University

Date Written: October 30, 2022

Abstract

We provide evidence that equity investors with limited attention are slow to incorporate information about how current oil price changes affect future earnings announcements. Stock prices respond to lagged quarterly oil price changes when firms start announcing earnings in the next quarter. A cross-sectional equity trading strategy that exploits this inefficiency yields an annualized Sharpe Ratio of 0.50. Our oil-response forecast strategy earns especially high returns after large absolute oil price changes and during the peak of the earnings cycle. The return predictability we document is not explained by risk factor exposure and survives a battery of robustness tests

Keywords: Asset Pricing, Anomalies, Oil Prices, Attention, Behavioral Finance, Earnings Announcements

JEL Classification: G10, G11, G14, G40, Q41

Suggested Citation

Moore, Jordan and Velikov, Mihail, Oil price exposure and the cross section of stock returns (October 30, 2022). Available at SSRN: https://ssrn.com/abstract=3164353 or http://dx.doi.org/10.2139/ssrn.3164353

Jordan Moore

Rowan University - Accounting & Finance ( email )

Glassboro, NJ 08028
United States

Mihail Velikov (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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