Risk factors in oil and gas industry returns: international evidence

Abstract

This paper analyzes the exposure of the oil and gas industry of 34 countries to oil prices. Using a multifactor panel model to estimate the oil and gas excess stock returns, our results strongly support the view that oil price is a globally priced factor for the oil industry. In particular, the response of the oil and gas sector to changes oil prices is positive and larger for developed countries than for emerging markets. The industry response is asymmetric, with positive oil price changes having a greater impact on the oil sector returns than negative changes. Furthermore, local market index returns, currency rates and oil price volatility also have a significant impact on oil industry's excess returns. Finally, industry local sensitivities seem to vary with stock market activity and with levels of appropriation of industry revenues by governments. Results are robust to a battery of tests.