Oil price exposure and the cross section of stock returns
54 Pages Posted: 17 Apr 2018 Last revised: 31 Oct 2022
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
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