Oil and Risk Premia in Equity Markets

Studies in Economics and Finance

Posted: 14 Nov 2019 Last revised: 26 Aug 2020

See all articles by Satish Kumar

Satish Kumar

ICFAI Foundation for Higher Education (IFHE)

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Aviral Kumar Tiwari

Rajagiri Business School; IFHE University (ICFAI) - Faculty of Management

Date Written: November 6, 2019

Abstract

We explore the oil-stock market nexus from a novel angle by examining the predictive role of oil prices over the excess returns associated with the market, size, book-to-market and momentum factors via bivariate cross-quantilograms. Our analysis of systematic risk premia across the four regions show that crude oil returns indeed capture predictive information regarding excess factor returns in stock markets, particularly those associated with market, size and momentum factors. However, the predictive power of oil return over excess factor returns is asymmetric and primarily concentrated on extreme quantiles, suggesting that large fluctuations in oil prices capture markedly different predictive information over stock market risk premia during up and down states of the oil market. The findings have significant implications for the profitability of factor or style based active portfolio strategies and suggest that the predictive information contained in oil market fluctuations could be utilized to enhance returns via conditional strategies based on these predictability patterns.

Keywords: Quantile, Correlogram, Predictability, Oil return, Risk premia

JEL Classification: C22, F31

Suggested Citation

Kumar, Satish and Demirer, Riza and Tiwari, Aviral Kumar, Oil and Risk Premia in Equity Markets (November 6, 2019). Studies in Economics and Finance, Available at SSRN: https://ssrn.com/abstract=3481593 or http://dx.doi.org/10.2139/ssrn.3481593

Satish Kumar

ICFAI Foundation for Higher Education (IFHE) ( email )

Hyderabad
India

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3144
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF)

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

Aviral Kumar Tiwari

Rajagiri Business School ( email )

Kochi, 682039
India

IFHE University (ICFAI) - Faculty of Management ( email )

India

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