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US Industry-Level Returns and Oil Prices

Fan, Qinbin and Jahan-Parvar, Mohammad R. (2009): US Industry-Level Returns and Oil Prices.

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Abstract

This paper takes a closer look at the puzzle uncovered by Driesprong et al. (2008) and finds empirical support for the "oil effect" in equity returns. Using forty nine US industry-level returns series and changes in oil spot and future prices, we address whether industry-level returns are predictable. We find that using changes in oil spot prices, the answer is yes; but for just under a fifth of industries in our sample. We find weak support for the predictability of industry-level returns based on changes in oil futures prices. Our findings are consistent with the delayed reaction to new information, a variant of Hong and Stein (1996)'s "underreaction" hypothesis.

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