Prediction of Industry-level Returns Based on Oil Price Changes
October 5, 2011 - Commodity Futures, Fundamental Valuation
Do oil price variations reliably affect returns for U.S. industry-level stock portfolios? In the June 2011 draft of their paper entitled “U.S. Industry-Level Returns and Oil Prices”, Qinbin Fan and Mohammad Jahan-Parvar apply several tests to investigate how oil price changes impact stock returns for 49 U.S. industries. They test economic significance by: (1) using a 60-month rolling historical window to model the predictive relationship between spot oil price changes and industry returns; (2) applying this relationship each month to the last observed oil price change to predict future industry returns; and, (3) investing in either industry portfolios or 4-week Treasury bills according to which has the higher expected return. They assume an industry portfolio-Treasury bill switching friction of 0.10%. Using monthly and weekly prices for West Texas Intermediate crude oil spot (January 1979 through January 2009) and nearest contract Cushing, Oklahoma light sweet crude oil futures (February 1986 through January), along with contemporaneous U.S. industry returns, they find that: Keep Reading