Do Oil Futures Prices Predict Stock Returns?

48 Pages Posted: 25 Oct 2016 Last revised: 2 Nov 2017

See all articles by I-Hsuan Ethan Chiang

I-Hsuan Ethan Chiang

University of North Carolina (UNC) at Charlotte

W. Keener Hughen

Sacred Heart University

Date Written: January 23, 2017

Abstract

This paper explores stock return predictability by exploiting the cross-section of oil futures prices. Motivated by the principal component analysis, we find the curvature factor of the oil futures curve predicts monthly stock returns: a 1% per month increase in the curvature factor predicts 0.4% per month decrease in stock market index return. This predictive pattern is prevailing in non-oil industry portfolios, but is absent for oil-related portfolios. The in- and out-of-sample predictive power of the curvature factor for non-oil stocks is robust and outperforms many other predictors, including oil spot prices. The predictive power of the curvature factor comes from its ability to forecast supply-side oil shocks, which only affect non-oil stocks and are hedged by oil-related stocks.

Keywords: Oil, Futures, Predictability, Curvature, Futures Curve

JEL Classification: G12, G13, G17

Suggested Citation

Chiang, I-Hsuan Ethan and Hughen, W. Keener, Do Oil Futures Prices Predict Stock Returns? (January 23, 2017). Journal of Banking and Finance, Vol. 79, 2017, Available at SSRN: https://ssrn.com/abstract=2856571 or http://dx.doi.org/10.2139/ssrn.2856571

I-Hsuan Ethan Chiang

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

HOME PAGE: http://go.uncc.edu/chiang

W. Keener Hughen (Contact Author)

Sacred Heart University ( email )

5151 Park Ave
Fairfield, CT 06432
United States

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