Fracking, Drilling, and Asset Pricing: Estimating the Economic Benefits of the Shale Revolution

69 Pages Posted: 2 Dec 2016  

Erik Gilje

University of Pennsylvania - The Wharton School

Robert C. Ready

University of Oregon - Department of Finance

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 28, 2016

Abstract

We quantify the effect of a significant technological innovation, shale oil development, on asset prices. Using stock returns on major news announcement days allows us to link aggregate stock price fluctuations to shale technology innovations. We exploit cross-sectional variation in industry portfolio returns on days of major shale oil-related news announcements to construct a shale mimicking portfolio. This portfolio can explain a significant amount of variation in aggregate stock market returns, but only during the time period of shale oil development, which begins in 2012. Our estimates imply that $3.5 trillion of the increase in aggregate U.S. equity market capitalization since 2012 can be explained by this mimicking portfolio. Similar portfolios based on major monetary policy announcements do not explain the positive market returns over this period. We also show that exposure to shale oil technology has significant explanatory power for the cross-section of employment growth rates of U.S. industries over this period.

Keywords: long-run growth, oil prices, shale oil, fracking, horizontal drilling, mimicking portfolios

JEL Classification: G12, G13, L71, Q43, O47

Suggested Citation

Gilje, Erik and Ready, Robert C. and Roussanov, Nikolai L., Fracking, Drilling, and Asset Pricing: Estimating the Economic Benefits of the Shale Revolution (November 28, 2016). Available at SSRN: https://ssrn.com/abstract=2876864 or http://dx.doi.org/10.2139/ssrn.2876864

Erik Gilje

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Robert C. Ready

University of Oregon - Department of Finance ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Nikolai L. Roussanov (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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