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Do oil price shocks drive systematic risk premia in stock markets? A novel investment application

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  • Demirer, Riza
  • Polat, Onur
  • Sokhanvar, Amin

Abstract

This paper examines the effect of oil price shocks on factor returns in a set of 62 stock markets. Oil price shocks capture significant predictive information regarding the size and direction of factor returns in global markets, depending on the market classification and nature of oil shock. Oil supply and precautionary demand shocks possess the greatest predictive power over risk premia, particularly for value and momentum. We argue that time varying investor sentiment and the flexibility of firms to respond to economic shocks drive the responses of factors to oil shocks. More importantly, a conditional global factor investing strategy wherein the investment positions are tilted towards factor-based portfolios, conditional on the size and direction of the oil price shock, yields significant improvements in returns. Our findings show that smart beta strategies can be significantly improved by conditioning factor positions based on the size and direction of oil market shocks.

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  • Demirer, Riza & Polat, Onur & Sokhanvar, Amin, 2025. "Do oil price shocks drive systematic risk premia in stock markets? A novel investment application," Research in International Business and Finance, Elsevier, vol. 73(PA).
    • Handle: RePEc:eee:riibaf:v:73:y:2025:i:pa:s0275531924003842
    DOI: 10.1016/j.ribaf.2024.102591
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    More about this item

    Keywords

    Oil price shocks; Equity market; Risk premia; Factor investing;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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