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The international natural gas price and its cross-sectional pricing implication: Evidence from Chinese stock market

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  • Xu, Zhiwei
  • Wang, Xuefei
  • Zhang, Teng

Abstract

This study investigates the role of international natural gas returns in the cross-sectional pricing of Chinese stocks. We find that stocks with higher sensitivity to the Henry-Hub natural gas returns (i.e., higher natural gas return beta) exhibit significantly lower future returns, suggesting a negative natural gas price risk premium. By exploring the underlying mechanism, we find that the results are consistent with the hedging demand theory that rational investors seek stocks with high potential to hedge against natural gas price risk but not driven by mispricing channel. Additionally, we demonstrate that the predictability of the Henry-Hub natural gas return beta for stock returns cannot be explained by other macro-betas, and this effect is primarily evident in manufacturing firms. However, we do not observe significant pricing effects from the Asian and European natural gas returns.

Suggested Citation

  • Xu, Zhiwei & Wang, Xuefei & Zhang, Teng, 2024. "The international natural gas price and its cross-sectional pricing implication: Evidence from Chinese stock market," Energy, Elsevier, vol. 313(C).
    • Handle: RePEc:eee:energy:v:313:y:2024:i:c:s0360544224037174
    DOI: 10.1016/j.energy.2024.133939
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    More about this item

    Keywords

    Henry hub spot price; The international natural gas return beta; Cross-sectional stock returns; Intertemporal hedging demand;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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