U.S. Industry-Level Returns and Oil Prices

35 Pages Posted: 16 Sep 2011 Last revised: 21 Jun 2012

See all articles by Qinbin Fan

Qinbin Fan

University of Iowa

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System

Date Written: September 14, 2011

Abstract

This paper empirically investigates and provides further support for the oil price effect documented in Driesprong et al. (2008) in the U.S. industry-level returns. We find that oil price predictability is concentrated in a relatively small number of industry-level returns, the relevant measure for a study of the oil effect is percentage change in oil spot prices, and changes in oil futures prices have virtually no prediction power for industry-level returns. With percentage changes in oil spot prices as the predictor, approximately one fifth of industry returns are oil-predictable. We detect a two trading weeks delay in reaction to oil price changes which is consistent with the Hong and Stein (1996) underreaction hypothesis. These results are robust to various alternative specifications, and are shown to be unrelated to time-varying risk premia. Moreover, we demonstrate that trading strategies based on the oil effect generate superior gains in comparison with buy-and-hold strategy in the presence of reasonable trading costs.

Keywords: Industry-Level Returns, Market Efficiency, Oil Prices, Return Predictability, Underreaction

JEL Classification: G11, G14, G17

Suggested Citation

Fan, Qinbin and Jahan-Parvar, Mohammad R., U.S. Industry-Level Returns and Oil Prices (September 14, 2011). International Review of Economics & Finance, Vol. 22, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=1927641 or http://dx.doi.org/10.2139/ssrn.1927641

Qinbin Fan

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

Mohammad R. Jahan-Parvar (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/mrjahan/

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