Oil Price Implied Structural Shocks and Cross-sectional Stock Returns

Abstract

High oil beta stocks earn higher returns than low oil beta stocks following periods of positive relationship between oil price changes and the aggregate market return, or following periods of favorable aggregate demand shock for industry commodities, and vice versa. When excluding high and low oil betas stocks from anomalies based on profitability, asset growth and momentum by incorporating the signs of the aggregate demand shock for industry commodity, the magnitude of the anomalous returns may be lowered by 38%.

Keywords: oil prices, return spread, cross section, factor model

JEL Classification: G12