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The Economic Impact of Oil on Industry Portfolios

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  • Jaime Casassus
  • Freddy Higuera

Abstract

We build an equilibrium model to disentangle industry-specific from business cycle effects of oil on stock returns. In our model oil is considered as an input factor for production and also as a macro variable. We estimate the model for 13 industries, including the oil industry. Our results suggest that the value of all non-oil industries decreases with an oil price shock. This result is explained by the effect of oil on the price-dividend ratios of the industries, in particular, by the significant negative effect of oil on their growth opportunities. The high persistence of the real oil price shocks makes these effects to be long-lived. The effect of oil on the current cash-flows is negative but small. This explains why the oil price shocks can produce such a significant effects on the US financial market despite the low US economy's oil intensity. The conditional expected portfolio returns decrease with the oil price because of the negative effect of oil on the market price of risk and interest rates. Moreover, industries with higher systematic risk have expected returns that are more affected by the oil price. We find that most of the systematic risk of the firms is explained by their output rather than by effect of oil on the cash-flows.

Suggested Citation

  • Jaime Casassus & Freddy Higuera, 2013. "The Economic Impact of Oil on Industry Portfolios," Documentos de Trabajo 433, Instituto de Economia. Pontificia Universidad Católica de Chile..
    • Handle: RePEc:ioe:doctra:433
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    More about this item

    Keywords

    oil price; business cycle; asset pricing; time-varying risk premia; industry stock returns; conditional CAPM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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