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Oil Price Exposure and the Cross-Section of Stock Returns

Author

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  • Jordan Moore
  • Mihail Velikov

Abstract

We provide evidence that equity investors are slow to process information about how current oil price changes affect future earnings announcements. Stock prices respond to lagged quarterly oil price changes when firms start announcing earnings in the next quarter. A cross-sectional equity trading strategy that exploits this predictability yields an annualized Sharpe ratio of 0.50. Our oil-response forecast strategy earns especially high returns after large absolute oil price changes, in recessions or bear markets, and during peak earnings season. The predictability we document is consistent with limited attention, is not driven by risk factor exposure, and survives several robustness tests. (JEL G10, G11, G14, G40, Q41)

Suggested Citation

  • Jordan Moore & Mihail Velikov, 2024. "Oil Price Exposure and the Cross-Section of Stock Returns," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(2), pages 274-309.
    • Handle: RePEc:oup:rasset:v:14:y:2024:i:2:p:274-309.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raad016
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    More about this item

    Keywords

    Asset Pricing; Anomalies; Oil Prices; Attention; Behavioral Finance; Earnings Announcements;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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