On the reactions of sectoral equity returns to oil price in France: Implications for portfolio allocation

Bouoiyour, Jamal and Selmi, Refk and Miftah, Amal (2016): On the reactions of sectoral equity returns to oil price in France: Implications for portfolio allocation.

Abstract

Instead of conducting overall stock market index analysis, this paper focuses on the reactions of sectoral equity returns (Industrials, Financials and Banks, Health care, Information Technology, Consumer goods, Materials, Oil and Gas, Telecommunications) to oil price changes in France. From a methodological perspective, this study uses a new method, called the quantile-on-quantile (QQ) approach. Even though this technique is based on the quantile regression paradigm, it departs from the conventional framework as the exogenous variable may be itself a quantile. It allows looking further into hidden factors driving the link between oil price and stock returns which the standard econometric methods are unsuitable to accommodate. QQ views the nature and sensitivity of the stock returns responses to oil price shocks change greatly across sectors of activity and tail distributions. Specifically, Industrials, Materials, and Oil and Gas equities are typically more reactive towards oil price shocks. The response of Financials and Banks is relatively weak, while it appears negligible for Health care, Information Technology, Consumer goods and Telecommunications. The frequency domain causality test (relying on signal theory) has demonstrated its functionality and adequacy in this exercise. On the basis of this article’ outcomes, market participants could enhance the risk-adjusted return of their portfolios by pursuing a sector-based portfolio investment strategy. Also, introducing oil asset into a diversified portfolio of stocks enables to invigorate its risk-return features.

• Item Type: MPRA Paper
• Language: English
• Keywords: Oil price; stock market; sector indices; France; QQ approach; frequency domain causality test.
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q43 - Energy and the Macroeconomy

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