Oil Price Movements and Risks of Energy Investments

25 Pages Posted: 26 Dec 2015 Last revised: 8 Feb 2016

See all articles by Gregory W. Brown

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Raymond Chan

Adams Street Partners

Wendy Hu

Burgiss

Jian Zhang

Adams Street Partners

Date Written: January 31, 2016

Abstract

This study examines the historical relation between oil price movements and both public and private equity investments in the energy sector. By utilizing two proprietary private equity databases (one at the fund-level and the other at the company-level), we are able to show that investments in energy focused private equity offer diversification benefits relative to similarly focused public equity and direct energy commodity investments. We find that public equity investments perform better than direct investments in energy commodities. Energy-focused private equity outperform energy-focused public equity. A nonlinear relationship between the returns on energy-focused equity investments (both public and private) and energy prices over multi-year investment periods suggests that equity investments may capture more upside exposure to energy prices over sufficiently long holding periods. This effect, which may be related to the real and financial options embedded in equities, appears stronger for private equity. We conclude that investors with a liquidity preference would have favored energy-focused public equities to direct energy commodity investments. Investors willing to tolerate lower liquidity and preferring greater diversification would have benefited from allocating disproportionately to energy-focused private equity.

Keywords: Oil Prices, Energy Prices, Commodity Exposure, Private Equity

JEL Classification: G12

Suggested Citation

Brown, Gregory W. and Chan, Raymond and Hu, Wendy and Zhang, Jian, Oil Price Movements and Risks of Energy Investments (January 31, 2016). Available at SSRN: https://ssrn.com/abstract=2708145 or http://dx.doi.org/10.2139/ssrn.2708145

Gregory W. Brown (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Raymond Chan

Adams Street Partners ( email )

1 N Upper Wacker Dr #22
Chicago, IL 60606

Wendy Hu

Burgiss ( email )

111 River St., 10th Floor
Hoboken, NJ 07030
United States

Jian Zhang

Adams Street Partners ( email )

1 N Upper Wacker Dr #22
Chicago, IL 60606

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