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MF
41,9
974
Received 7 February 2014
Revised 25 March 2015
Accepted 1 April 2015
Managerial Finance
Vol. 41 No. 9, 2015
pp. 974-994
© Emerald Group Publishing Limited
0307-4358
DOI 10.1108/MF-02-2014-0029
U.S. oil company stock returns
and currency fluctuations
Andre Mollick and Khoa H. Nguyen
Department of Economics and Finance, University of Texas Pan American,
Edinburg, Texas, USA
Abstract
Purpose – The purpose of this is paper is to pay a closer look at the 2008-2009 financial crisis (and its
aftermath) and analyzes stock returns of nine major US oil companies as well as the oil and gas sector
under daily data from January 1992 to April 2012.
Design/methodology/approach – The authors adopt the arbitrage pricing theory model to examine
the relationship between stock returns and their influences including oil price return, yield spreads, and
US dollar index return. The authors also provide a test for structural changes in each regression model
of return series to capture for multiple breaks. To examine the asymmetric effect of oil price returns on
stock returns, the authors separate oil price returns series into two series: positive changes in oil price
and negative changes in oil price.
Findings – The authors find stock returns of oil companies as well as the oil and gas sector are
positively affected by oil prices and have stronger effects in the downward direction. Interestingly,
The authors find the effects of oil price movements on stock returns increase over time. The authors
examine the possibility that investors wishing to hedge against a weakening USD invest in US oil
companies and find that more than half of these companies benefit from a weaker USD against the JPY,
while all strongly benefit from a weaker USD against major currencies.
Originality/value – The authors employ daily data for two-decade period including the last global
financial crisis. Due to the long-term period covered in this study, sequential Bai-Perron tests are used
to detect structural breaks of stock return series. In addition, the data-dependent procedures result in
good specifications throughout with white-noise processes in almost all cases.
Keywords USA, Stock returns, Exchange rates, Oil companies, Oil prices
Paper type Research paper
1. Introduction
For several reasons, derived from the very volatile nature of its business, oil companies
should be particularly affected by oil price movements as well as other financial forces.
As noted by Sadorsky (2001), oil companies are not only very capital intensive, but also
face depleting natural resources. And since product differentiation is not possible the
best performing companies (as measured by the returns of their public stocks in equity
markets) probably reflect more efficient and cost minimizing producers. Overall, the
number of forces affecting oil prices is simply too many, as recently reviewed by Smith
(2009). We employ in this paper a two-decade long period including the last global
financial crisis of 2008-2009, which may have modified the responses of stock returns to
oil. Building on previous studies, we reexamine – under daily data – exchange rate (and
term spread) effects on major oil and gas companies and focus on two major sources of
asymmetries. First, when taking into account structural breaks in the responses of
stock returns to oil (varying by company), we find increasing effects of oil price
movements on stock returns over time. Second, we confirm that stock returns respond
differently to daily upward or downward movements of crude oil.
JEL Classification — F31, G15
 At the financial side, if firms are big and have access to financial instruments Stock returns
hedging techniques should help firm’s market value and make prices less sensitive to and currency
interest rate and foreign exchange risk. When Jin and Jorion (2006) investigate 119 US
oil and gas producers from 1998 to 2001, they find that oil and gas β’s are negatively
fluctuations
related to the extent of hedging. Yet, hedging does not seem to affect market value
for the industry, which is consistent with the Modigliani and Miller (1958) proposition
that in perfect capital markets risk management should be irrelevant. It is, however, an 975
open question whether the returns of oil companies respond to currency fluctuations.
While it is clear that major oil companies may decide not to hedge its foreign
exchange exposure, it is possible that their decision depends on the price of oil, as
evidenced in the recent episode of Chevron’s exposure to the Australian dollar
reported by Denning (2012).
The channel through which oil prices affect stocks depends on how the economy is
affected. Earlier studies, starting perhaps with Hamilton (1983), assessed that crude oil
price changes and US GNP growth are related. Using postwar data until 1991, Jones
and Kaul (1996) find that the response of US and Canadian stock prices to oil shocks
differs from those of UK and Japanese markets. Oil prices have been found to have
an impact on exchange rates as reported by Amano and Van Norden (1998), Chen
and Chen (2007), Bénassy-Quéré et al. (2007), and Lizardo and Mollick (2010), while
Beckmann and Czudaj (2013) show that the choice of effective US dollar index matters,
as well as the pattern of causality. For the literature based on oil price shocks, see
Killian and Park (2009), among others.
At the aggregate stock markets, Driesprong et al. (2008) use monthly data from
October 1973 to April 2003 and find usually negative coefficients when estimating
stock returns on lagged oil prices. Examining global industry indices from April 1983
to September 2005, Nandha and Faff (2008) report that (unexpected) WTI oil price
increases have a negative impact on equity returns for all 35 sectors (the highest
exposure being the insurance sector with a −0.131 coefficient). Yet, they also find
positive responses in mining (0.076 coefficient), and oil and gas industries (0.154
coefficient); oil and gas companies are found to have a β sensitivity to the market of
0.758 (well within the range from 0.547 to 1.425 for other sectors) over the period. For
the six GCC aggregate stock markets responding to oil prices under daily data over
June 2005 to February 2010, Arouri et al. (2011) find positive effects in half with no
effects for the other half of the countries.
Sadorsky (2001) uses a multifactor model for Canadian oil and gas sector returns
from April 1983 to 1999 (monthly data). He finds strong positive effects of oil on returns
of the oil and gas sector (statistically significant coefficient of 0.305), negative but small
effects of the term premium (coefficient of −0.021), and a surprising negative effect of
the weaker Canadian dollar (coefficient of −1.055). He conjectured the latter negative
sign on CAD/USD is due to the increase in firm costs by more than the increases in firm
revenues. One study analyzing individual oil companies has been recently conducted
by Mohanty and Nandha (2011), who use the Fama-French-Carhart’s four factor asset
pricing model for US oil and gas companies under monthly data from July 1992 to
December 2008. They find positive coefficients for 33 out of 40 companies: as the oil
price shock increases, so do stock returns of these companies. Talbot et al. (2013) also
examine firm-level data of 59 North American oil firms with quarterly observations
from January 1999 to December 2008.
One important limitation of some of the past studies is the frequency of observations
since presumably most of the fluctuations in oil and other financial markets are
MF incorporated into stock returns at a higher than monthly frequency rate. For that
41,9 matter, Hammoudeh and Aleisa (2004) examine daily GCC stock markets with mixed
results; and Bachmeier (2008) uses daily data from January 1986 to October 2003 and
shows that oil price shocks have negative effects on US stock returns, albeit with a very
low explanatory power. Hammoudeh and Li (2005) compare the oil sensitivity of equity
returns of non-Gulf oil based countries (Mexico and Norway) to two major oil-sensitive
976 sectors (oil and transportation US industries) with daily data from January 1986 to
September 2003, with varying effects. Reported R2s in Hammoudeh and Li (2005) vary
from 6 percent (Norway Oslo All Shares) to 12 percent (US Amex Oil), which likely
reflect the fact that the only two factors in their model (market returns and oil returns)
do not explain a whole lot of equity price movements.
In general, previous studies with daily data tend to report very low explanatory
power. An exception is El-Sharif et al. (2005), who cover daily data from January 1989 to
June 2001 and document a positive relationship between the price of crude oil and
equity values in the oil and gas sectors in the UK (with coefficients varying across
sub-periods from 0.073 to 0.227). Market βs vary from 0.453 to 1.259 depending on
the sub-period and the response to exchange rates is negative: as the GBP appreciated
against the USD, returns fall.
Another important dimension, not captured in the literature above, is the changing
correlation between stocks and oil over time. In particular, the recent major financial
crisis of 2008-2009 may have altered the co-movements between stocks and oil. Figure 1
(a) presents the relative growth of oil prices and the US Standard & Poor (S&P) 500
equity market (see the next section for details on data sources). Oil prices achieved their
peak during the recent financial crisis ($145.66 on July 11, 2008). For the S&P500 index,
it is easy to see the drops caused by the two more recent US recessions: the “mild”
recession from March to November of 2001 and the more severe one of 2008-2009.
The co-movements are as follows: Oil prices declined in the late 1990s when the
productivity boom pushed up US equities. Yet both series moved together in the first
part of the 2000s. Stocks fell before the 2008-2009 global financial crisis while oil kept
moving up. Since the market bottom of March 2009, both series appear to share
common trends as shown clearly in the figure.
Some recent studies have examined the crisis period and the links between major
stocks and oil markets. An example is Filis et al. (2011), who use monthly data for oil
(Brent) prices and major stock market indices of three oil-exporting countries (Canada,
Mexico, and Brazil) and three oil-importing countries (US, Germany and the Netherlands)
from January 1987 to September 2009 or from January 1988 to September 2009 in the case
of Mexico. Employing a DCC-GARCH-GJR approach, Filis et al. (2011) find that lagged
correlation results show that oil prices have a negative effect in all stock markets,
regardless of the origin of the shock, with the only exception being the 2008 global
financial crisis. Degiannakis et al. (2013) allow for time-varying considerations when
examining oil price returns and European industrial sector indices. As reported
recently by Mollick and Assefa (2013) for a class of GARCH models under daily data,
the major financial crisis of 2008-2009 has fundamentally changed the co-movements
between US stocks and oil markets. Alternative methodologies include Ciner (2013)
with the frequency domain approach and Reboredo and Rivera-Castro (2014) with the
wavelet methodology.
Using daily data, this paper pays a closer look at the 2008-2009 financial crisis (and
its aftermath) and analyzes stock returns of nine major oil companies as well as the oil
and gas sector value-weighted index. We examine the possibility that investors
 (a) (b)
150 0.04 150
1,500

0.03

100 100
0.02
1,000

Yield
0.01

S&PCOMP(PI)
CRUDOIL(P)
CRUDOIL(P)

50 50

500
S&PCOMP(PI) CRUDOIL(P) 0 –0.01 Yield CRUDOIL(P) 0
1 jan 1992 1 jan 1997 1 jan 2002 1 jan 2007 1 jan 2012 1 jan 1992 1 jan 1997 1 jan 2002 1 jan 2007 1 jan 2012

(c) (d)
150 160 150
110

140
100
100 100

120
90

JYEN_US

USD_major
CRUDOIL(P)
CRUDOIL(P)

50 50
80 100

70 80
USD_major CRUODIL(P) 0 JYEN_US CRUDOIL(P) 0
1 jan 1992 1 jan 1997 1 jan 2002 1 jan 2007 1 jan 2012 1 jan 1992 1 jan 1997 1 jan 2002 1 jan 2007 1 jan 2012
fluctuations
and currency
Stock returns

other series
Oil price and
Figure 1.
977
MF wishing to hedge against a weakening USD invest in US oil companies, as recently
41,9 mentioned in the financial press by Wang (2012). We find that more than half of these
companies benefit from a weaker USD against the JPY, while all strongly benefit from a
weaker USD against major currencies. Our findings suggest oil price fluctuations are
“priced in” the stock returns of major US oil firms, which are able to smooth out severe
economic downturns, including the recent financial crisis.
978
2. The data
Our sample contains daily returns of oil and gas companies as well as oil and gas sector
index (value-weighted) from January 1992 to March 2012. Firms used in this study are
listed in Fortune magazine (see web site at: http://money.cnn.com/magazines/fortune/
fortune500/2012/industries/20/) under petroleum refining industry as the top performers
in gross revenues. Three of the nine companies (Sunoco, Tesoro, and Valero Energy)
belong to the Exploration & Production group and the remaining six (Conocophillips,
Chevron, Hess, Marathon Oil, Murphy Oil, and Exxon Mobil) belong to the Integrated &
Gas group. As reported on May 21, 2012, there are 12 companies in this list and we
exclude three companies (HollyFrontier, CVR Energy, and Western Refining) due to data
limitations[1]. The remaining nine companies are all very large in production[2]. Oil and
gas sector value-weighted index is collected from Professor Kenneth R. French web site
(http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html).
A major US stock market index, the S&P index, is also included. The notes to Table I
contain all mnemonics for the variables in this paper. For the bilateral exchange rate
(between US dollar and Japanese yen) an increase means a USD appreciation and for
the exchange rate between US dollar and major currencies (the Euro area, Canada,
Japan, UK, Switzerland, Australia, and Sweden) an increase also means a USD
appreciation; the index has base March 1973 ¼ 100. All data are collected from
Datastream except for yield spreads and exchange rates, which are collected from the
Federal Reserve Board of St Louis web site (http://research.stlouisfed.org).
The descriptive statistics for all the variables used in this study are presented in
Table I. According to the mean returns reported in the table, most of the oil and gas
companies out-perform the market index’s return (S&P 500 index). Among all
companies, Conocophillips and TESORO have the highest mean return of 0.04 percent
during the period while Hess and Sunoco share the lowest mean returns of 0.02 percent.
On the other hand, the stock returns of oil and gas companies are more volatile than
S&P 500 market index. TEROSO stock return has the highest standard deviation
among companies with 3.54 percent while the figure for S&P 500 is 1.20 percent.
Overall, oil and gas sector has a mean return of 0.06 percent which is higher than the
mean returns of the nine companies in this study.
During the period of study, oil price fluctuates from $10.73 to $145.66 with an
average price of $42.68 and a mean return of 0.03 percent. Hache and Lantz (2013)
provide a recent study of the functioning of the WTI market. On exchange rates, daily
mean returns are slightly negative (−0.0001) for the JPY/USD: a depreciation of the
USD against the yen over time, with standard deviation of 0.0070 and minimum
daily fluctuations of −0.0563 and maximum daily fluctuations of 0.0324. In contrast, daily
mean returns are steadier for the USD vs major currencies (−0.0000), with lower standard
deviation of 0.0045 and lower minimum daily fluctuations of −0.0411 and maximum
daily fluctuations of 0.0215.
Figure 1(a) highlights the behavior of crude oil against S&P 500 over time: the
correlation coefficient in levels is 0.555; in returns it is a more modest 0.112. Table II
Names Variables Mean Min. Max. Obs. SD
Stock returns
and currency
Conocophillips ret_COPPI 0.0004 −0.1487 0.1536 5,107 0.0185 fluctuations
Chevron ret_CVXPI 0.0003 −0.1334 0.1894 5,107 0.0163
Hess ret_HESPI 0.0002 −0.2127 0.1544 5,107 0.0227
Marathon Oil ret_MROPI 0.0003 −0.2177 0.2099 5,107 0.0220
Murphy Oil ret_MURPI 0.0003 −0.1881 0.1589 5,107 0.0203
Sunoco ret_SUNPI 0.0002 −0.2258 0.1962 5,107 0.0222 979
Tesoro ret_TSOPI 0.0004 −0.3570 0.2886 5,107 0.0354
Valero Energy ret_VLOPI 0.0003 −0.2231 0.1653 5,107 0.0253
Exxon Mobil ret_XOMPI 0.0003 −0.1503 0.1586 5,107 0.0157
Oil and gas sector (value-weighted) ret_OIL_GAS_sector 0.0006 −0.1538 0.1927 5,039 0.0158
S&P 500 ret_SPCOMPPI 0.0002 −0.0947 0.1096 5,107 0.0120
Oil price ($) CRUDOILPI 42.68 10.73 145.66 5,107 29.13
Oil price returns ret_CRUDOILPI 0.0003 −0.1722 0.2128 5,107 0.0240
Trade weighted US Dollar Index ret_USD_major −0.0000 −0.0411 0.0215 5,107 0.0045
Exchange rate-JPY/USD ret_JYEN_US −0.0001 −0.0563 0.0324 5,107 0.0070
Yield spread yield_spread 0.0190 −0.0077 0.0394 5,107 0.0121
Change in yield spread change_spread 0.0000 −0.0051 0.0074 5,107 0.0007
Notes: We use daily data from January 2, 1992 to April 10, 2012. ret_COPPI, ret_CVXPI, ret_HESPI,
ret_MROPI, ret_MURPI, ret_SUNPI, ret_TSOPI, ret_VLOPI, ret_XOMPI and ret_SPCOMPPI
represent the first difference of log of the following daily prices of oil companies or indices:
Conocophillips, Chevron, Hess, Marathon Oil, Murphy Oil, Sunoco, Tesoro, Valero EnergY, Exxon
Mobil S&P 500, respectively. ret_OIL_GAS_sector is the value-weighted index returns of Oil and Gas
sector that is collected from professor Kenneth R. French’s web site. CRUDOILPI is price of West
Texas Intermediate (WTI), expressed in US $/barrel and ret_CRUDOILPI represents the first
difference of log of the following daily prices of WTI. ret_USD_major is the first difference of log of the
daily Trade Weighted US Dollar Index against major currencies. ret_JYEN_US is the first difference of
log of the daily exchange rate between US dollar and Japanese yen which is constructed by Japanese
yen per 1 US dollar. Yield_spread is ten-year T-bond minus three month T-bill and change_spread is Table I.
daily change of yield_spread Descriptive statistics

Panel A: correlation levels

SPCOMPPI CRUDOILP USD_major JYEN_US yield_spread
SPCOMPPI 1.000
CRUDOILP 0.555 1.000
USD_major −0.070 −0.748 1.000
JYEN_US −0.042 −0.518 0.680 1.000
yield_spread −0.443 0.065 −0.173 −0.224 1.000
Panel B: correlation returns/differences
ret_OIL_ ret_ ret_ ret_ ret_ change_
GAS_sector SPCOMPPI CRUDOILP USD_major JYEN_US spread
ret_OIL_GAS_sector 1.000
ret_SPCOMPPI 0.671 1.000
ret_CRUDOILP 0.384 0.112 1.000
ret_USD_major −0.156 −0.064 −0.163 1.000
ret_JYEN_US 0.075 0.134 0.042 0.532 1.000
change_spread 0.074 0.096 0.082 −0.008 0.033 1.000
Notes: Panel A reports correlation coefficients in levels. Panel B reports correlation coefficients in Table II.
returns or differences. The study uses daily data from January 2, 1992 to April 10, 2012. Descriptions of Correlation
variables used in this table can be found in Table I and in the data section of the paper coefficients
MF reports the correlation coefficients between variables (in level or return/change form)
41,9 used in this study. Panel A of Table II reports correlations of the series in levels.
For example, over the two decade period, oil returns commove positively with S&P
500 returns (0.555) and commove negatively with the value of the USD against the
Japanese yen (−0.518) and against major currencies (−0.748). There is therefore
a negative relationship between the value of crude oil and the value of the USD:
980 a moderate correlation with the JPY/USD and a much stronger correlation with
USD against major currencies. Panel B of Table II reports correlations of the series in
returns or in first-differences. According to panel B, all pairs of variables have
very low correlation coefficients, except between USD_major and JYEN_US
exchange rates (0.532) and between returns of oil and gas sector with the overall market
(0.671). Correlation coefficients as high as these suggest we do not include both variables
in the same regression when running models of stock returns. Also, the correlation
between returns of oil price and exchange rates in panel B drops substantially to −0.163
for major currencies and to 0.042 for the JPY/USD. Effective and bilateral exchange
rates are positively correlated with each other as expected: 0.680 in levels and 0.532 in
first-differences.
Figure 1(b) displays the yield spread and oil price. As documented by Ang et al.
(2006), the yield curve has predictive power over future GDP and our Figure 1(b)
shows that the yield curve spread was falling before the recessions. When computed
in return or change form, the correlation coefficient between changes in yield spread
and WTI crude oil is 0.082 during the two-decade long period. Figure 1(c) and 1(d)
display the two exchange rates vs oil prices. First, Figure 1(c) shows that the USD
appreciates against major currencies during the US productivity boom of the 1990s
and depreciates all the way until the financial crisis around 2008 after peaking in
early 2002. Second, Figures 1(d) shows that JPY/USD exchange rate has a very close
negative relationship with oil prices more recently. Yet this relationship was
not observed during the spring of 1995 period, when the Japanese yen appreciated
strongly. Overall, the correlation coefficients between the two series are high in levels
as displayed in Figure 1(c) and (d) but are quite low when calculated in returns as
discussed above.

3. Empirical methodology
The linkage between oil price and stock returns has been extensively studied. Using
the theoretical model based on Chen et al. (1986), Mohanty and Nandha (2011) revisit
the relationship between oil price and selected US oil and gas companies. Since the
firm’s stock price is determined by discounting that firm’s present value of future
cash flows, expected stock price of the firm should be affected by changes in either
expected future cash flows or by the discount rate. On the one hand, because oil and
gas companies rely their profits heavily on oil price movements, changes in oil prices
lead to changes in expected future cash flows thus affecting the stock price of the
companies. On the other hand, since oil is one of the most important commodities,
changes in oil price may track the inflation rate and thus affect the determination
of the nominal interest rate, which discounts cash flows. In short, oil price changes
could affect stock price of a company through fluctuations in cash flows as well as in
the discount rate.
Researchers who empirically examine the relationship between oil price and
stock returns use two different frameworks: the arbitrage pricing theory (APT)
model developed by Ross (1976) or the multi-β capital asset pricing (CAPM) model.
The results from these two frameworks are usually similar. APT has been, however, Stock returns
long known for its less strict assumptions. In addition, one disadvantage of multi-β and currency
CAPM model is that there are high correlations between series of the excess returns
of market and series of the returns of high-minus-low (HML) or small-minus-big
fluctuations
(SMB) portfolios in several time periods. For example, the correlation coefficient
between market excess returns and HML is 0.58 for the period of recent financial crisis
(January 1, 2008 to June 30, 2009). In this study, we adopt the APT model to examine 981
the relationship between stock returns and oil price, following Faff and Brailsford
(1999), El-Sharif et al. (2005), and Sadorsky (2008). Another possible interpretation is
through international factor models proposed by Ferson and Harvey (1994), Jin and
Jorion (2006), and Ramos and Veiga (2011). Our model for individual oil firms is
described as follows:
Ri;t ¼ ai þ b1;i Rmkt;t þ b2;i Ret_CRU DOI LPI t þ b3;i Change_spread t

þ b4;i Ret_U SDt þ b5;i Regimesi;t þ b6;i Regimesi;t

Ret_CRU DOI LPI t þ b7;i Other_controlst þ ei;t (1)
where: Ri,t are stock returns for firm i at time t. Rmkt,t are returns on aggregate
market at time t as proxied by the returns on US S&P 500 index. Ret_CRUDOILPIt are
returns on WTI oil price at time t. Ret_USDt are returns of exchange rate between USD
and the trade weighted major index (ret_USD_majort) or between USD and the
Japanese yen (ret_JYEN_USt) at time t. Change_spreadt refers to the change in yield
spread, defined as the yield of the US Treasury ten-year note minus the yield of the
three-month T-bill. This definition of the term spread follows Chen et al. (1986) as well
as more recent works, such as Kurov (2010) and Mollick and Assefa (2013). Regimesi,t
are dummy variables indicating breaking periods and uniquely identified for each oil
and gas company, and the oil and gas value-weighted sector. The construction of the
Regimes variables is detailed in the next paragraph. We allow for interactive terms
between Ret_CRUDOILPIt and several Regimesi,t in order to capture the changing
nature of oil and stock returns during the different time spans. Other_controls
represents for other control variables in the model such as: Mon, Tue, Wed and
Thu. Mon, Tue, Wed and Thu are dummy variables that are equal to 1 if trading
day is Monday, Tuesday, Wednesday or Thursday, respectively, otherwise zero[3].
The existence of day of the week effects in asset returns documented in Gibbons
and Hess (1981) leads to an inclusion of weekday dummies in the analysis. εi,t is the
idiosyncratic error term[4].
Given the long-term period covered in this study, one would expect structural
breaks in returns[5]. In this paragraph, we provide a test for parameter instability and
structural change in each regression model of return series. This sequential testing of
l vs l+1 breaks using the methods outlined by Bai and Perron (1998, 2003). This test
begins with an estimation of equation specification using least squares. This specification
includes each of the return series as dependent variable, a constant and return of oil price
as a regressor. After the specification is estimated, we perform sequential Bai-Perron test
(Bai and Perron, 1998, 2003) on stability of estimated parameters to detect number of
breaks and break dates of examined series. When break dates are endogenously and
uniquely detected for each of studied return series, we form Regimesi dummy variables
uniquely for each return series. The results of the Bai-Perron tests are reported in
Table III. Taking Marathon Oil as an example, Table III shows that Marathon Oil
 MF
41,9

982

and sector
Table III.

and gas companies

Multiple breakpoints
test for returns of oil
Panel 1A: Bai-Perron multiple breakpoints test
UCOPP UCVXP UHESP UMROP UMURP
Break test Scaled F-statistic Break test Scaled F-statistic Break test Scaled F-statistic Break test Scaled F-statistic Break test Scaled F-statistic
0 vs 1 * 61.550 0 vs 1 * 22.757 0 vs 1 * 94.123 0 vs 1 * 69.202 0 vs 1 * 103.249
1 vs 2 8.262 1 vs 2 4.071 1 vs 2 * 15.601 1 vs 2 * 24.149 1 vs 2 * 32.015
2 vs 3 8.113 2 vs 3 11.370 2 vs 3 * 19.091
3 vs 4 4.398
Panel 1B: break dates
1 3/24/2004 1 9/20/2005 1 6/1/1998 1 6/1/1998 1 5/29/1998
2 5/2/2005 2 3/31/2005 2 3/31/2005
3 2/27/2009
Panel 2B: Bai-Perron multiple breakpoints test
USUNP UTSOP UVLOP UXOMP Oil_Gas_Sector
Break test Scaled F-statistic Break test Scaled F-statistic Break test Scaled F-statistic Break test Scaled F-statistic Break test Scaled F-statistic
0 vs 1 * 41.562 0 vs 1 * 59.420 0 vs 1 * 42.951 0 vs 1 * 39.749 0 vs 1 * 69.165
1 vs 2 * 17.452 1 vs 2 * 25.691 1 vs 2 * 31.342 1 vs 2 6.115 1 vs 2 * 19.087
2 vs 3 * 17.130 2 vs 3 3.314 2 vs 3 8.322 2 vs 3 4.605
3 vs 4 0.968
Panel 2B: break dates
1 5/29/1998 1 2/20/2001 1 1/28/1999 1 5/2/2005 1 6/1/1998
2 12/11/2003 2 3/19/2009 2 2/20/2009 2 3/31/2005
3 3/18/2009
Notes: This table provides tests for parameter instability and structural change in regression models. This sequential testing of vs l+1 breaks using the
methods outlined by Bai and Perron (1998) and Bai and Perron (2003). Panels 1A and 2A present the Bai-Perron multiple breakpoints test for 9 individual
companies and 1 Oil and Gas sector (value weighted) returns while panels 1B and 2B indicates numbers of breaks and breaking dates. *Statistically significant
at 5 percent level based on the critical value of Bai and Perron (2003)
(UMROP) has two breaks in the company’s return series. One is at June 1, 1998 and the Stock returns
other one is at March 31, 2005. From these two break dates, we form three dummies and currency
variables, Regime1, Regime2 and Regime3. Regime1 takes on value of 1 if data is from the
beginning to May 31, 1998, zero otherwise. Regime2 takes on value of 1 if data is from
fluctuations
June 1, 1998 to March 30, 2005, zero otherwise. Regime3 takes on value of 1 if data from
March 31, 2005 to later, zero otherwise.
In order to examine how hedging affects the stock return sensitivity to oil, 983
Jin and Jorion (2006) report monthly data results from 1999 to 2002 for 38 firms
and interact relative production deltas at the end of the previous year (hedging)
and oil reserve/market value of equity with the change in oil prices. Their main
hypothesis is that hedging reduces the stock price sensitivity to oil (and gas)
prices. They do find statistically significant components for these interactions and,
more importantly, the oil-β coefficient goes down from 0.215 to 0.203 percent
for the three-factor model in the separate oil regression. We adopt a similar
experiment but we will use only market-based variables and not those related
to the firm as in Jin and Jorion (2006) or Talbot et al. (2013) since we are using
herein higher-frequency data.
To examine the asymmetric effect of oil price returns on stock returns, we separate oil
price returns series into two series: positive changes in oil price (Ret_CRUDOILPI_up)
and negative changes in oil price (Ret_CRUDOILPI_down). This allows us to examine in
detail how different in the magnitude of the impact of an increase in oil price and
decrease in oil price on stock returns. To test for the different between β coefficients
of Ret_CRUDOILPI _up and Ret_CRUDOILPI _down, we use the Wald test with the
null hypothesis that the coefficients are symmetric as in Sadorsky (2008). Equation (2)
examines the asymmetric effects of oil price returns on US Oil and Gas companies’
stock returns:

Ri;t ¼ ai þ b1;i Rmkt;t þ b2;i Ret_CRU DOI LPI _upt þ b3;i Ret_CRU DOI LPI _downt

þ b4;i Change_spread t þ b5;i Ret_U SDt þ b6;i Regimesi;t þ b7;i Other_controlst þ ei;t
(2)
where Ri,t are returns for company i at time t and other variables are as in (1).
Equation (2) focusses on asymmetry: the very fact that returns do not respond in the
same way when oil prices move up than when oil prices move down.

4. Results
Table IV(a) and (b) report the empirical estimations of (1) for each of individual
oil and gas firms. All the estimates for (1) include an AR (p) process. We use
a data-dependent approach to identify the value of p, following goodness of fit
procedures discussed by Enders (2004). For each individual firm, we run (1) ten
times with ten different AR (p) processes ranging from 1 to 10. In order for p to be
identified for each individual oil and gas firm models, it has to meet two criteria: the
equation with that AR (p) process must generate error term that is a white-noise
process; and among those AR (p) that meet (1), we pick the AR (p) process that produces
the lowest Akaike information criterion (AIC) and Bayesian information criterion
(BIC). We report at the top of the tables the chosen order of the AR (p) model using
this procedure.
 MF
41,9

984

Table IV.

(Equation (1))
The impact of oil
prices on oil firms
UCOPP UCVXP UHESP UMROP UMURP USUNP UTSOP UVLOP UXOMP Oil_Gas_Sector
AR(2) AR(5) AR(2) AR(5) AR(2) AR(1) AR(1) AR(2) AR(8) AR(2)

(a): USD index

ret_SPCOMPPI 0.759*** 0.746*** 0.879*** 0.896*** 0.739*** 0.833*** 1.132*** 0.923*** 0.745*** 0.806***
(0.018) (0.015) (0.021) (0.021) (0.019) (0.023) (0.038) (0.026) (0.014) (0.013)
ret_CRUDOILP 0.147*** 0.150*** 0.142*** 0.093*** 0.092*** 0.037 0.051* 0.043* 0.119*** 0.114***
(0.012) (0.009) (0.022) (0.022) (0.020) (0.023) (0.030) (0.024) (0.009) (0.013)
change_spread −0.572* −0.548** 0.312 −0.135 0.056 0.210 1.432** 0.798* −0.545** −0.283
(0.299) (0.253) (0.356) (0.353) (0.327) (0.384) (0.648) (0.437) (0.242) (0.213)
ret_USD_major −0.244*** −0.236*** −0.410*** −0.326*** −0.371*** −0.055 −0.141 −0.252*** −0.107*** −0.217***
(0.048) (0.041) (0.057) (0.057) (0.053) (0.062) (0.104) (0.070) (0.039) (0.034)
regime2 0.000 0.000 0.000 0.000 0.001 0.000 0.001 0.001** −0.000 0.000
(0.000) (0.000) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000) (0.000)
regime3 0.000 0.000 0.000 0.000 −0.000 −0.000 0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
regime4 −0.001 0.000
(0.001) (0.001)
regime2*ret_CRUDOILP 0.118*** 0.050*** 0.099*** 0.128*** 0.133*** 0.119*** 0.212*** 0.228*** 0.034** 0.077***
(0.018) (0.015) (0.027) (0.027) (0.025) (0.030) (0.040) (0.029) (0.015) (0.016)
regime3*ret_CRUDOILP 0.280*** 0.225*** 0.277*** 0.207*** 0.245*** 0.220*** 0.146***
(0.028) (0.027) (0.027) (0.030) (0.065) (0.043) (0.017)
regime4*ret_CRUDOILP 0.295*** 0.236***
(0.034) (0.041)
mon −0.000 0.001* −0.001 −0.001* −0.000 −0.001 −0.003** −0.002* 0.001 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
tue −0.001 0.001 −0.001 −0.002** −0.001 −0.001* −0.002 −0.001 0.001 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
wed −0.001 −0.000 −0.002** −0.001 0.000 −0.001 −0.001 −0.000 0.000 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
thu −0.001** −0.000 −0.002*** −0.002*** −0.001 −0.001 −0.002* −0.001 −0.000 −0.001
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
intercept 0.001* −0.000 0.001 0.001 0.000 0.001 0.001 0.000 -0.000 0.001
(0.000) (0.000) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000) (0.000)
n 5105 5102 5105 5102 5105 5106 5106 5105 5099 5037
Adj. R2 0.37 0.42 0.40 0.38 0.38 0.28 0.19 0.28 0.43 0.56
Log likelihood 14307.92 15155.09 13411.78 13457.77 13865.47 13047.51 10366.59 12381.22 15367.96 15827.49

(continued )
 UCOPP UCVXP UHESP UMROP UMURP USUNP UTSOP UVLOP UXOMP Oil_Gas_Sector
AR(2) AR(5) AR(2) AR(5) AR(2) AR(1) AR(1) AR(2) AR(8) AR(2)

AIC −28589.84 −30278.17 −26793.56 −26879.54 −27696.95 −26063.02 −20705.17 −24732.44 −30697.92 −31624.98
BIC −28504.84 −30173.57 −26695.49 −26761.86 −27585.80 −25958.41 −20613.64 −24634.37 −30573.72 −31527.11
DW 2.014 1.964 2.022 2.018 2.012 2.007 2.011 2.036 1.930 1.966
Q(5) 7.574 8.711 3.928 5.415 7.753 7.405 1.126 6.073 10.252* 16.756***
[0.181] [0.121] [0.560] [0.367] [0.170] [0.192] [0.952] [0.299] [0.068] [0.005]

(b): JPY
ret_SPCOMPPI 0.767*** 0.753*** 0.889*** 0.907*** 0.746*** 0.832*** 1.133*** 0.924*** 0.747*** 0.813***
(0.018) (0.015) (0.021) (0.021) (0.020) (0.023) (0.039) (0.026) (0.014) (0.013)
ret_CRUDOILP 0.148*** 0.151*** 0.141*** 0.093*** 0.091*** 0.036 0.051* 0.043* 0.120*** 0.114***
(0.012) (0.009) (0.022) (0.022) (0.020) (0.023) (0.030) (0.024) (0.009) (0.013)
change_spread −0.578* −0.558** 0.296 −0.146 0.020 0.199 1.414** 0.765* −0.552** −0.294
(0.299) (0.253) (0.358) (0.353) (0.328) (0.384) (0.648) (0.438) (0.242) (0.214)
ret_JYEN_US −0.065** −0.078*** −0.082** −0.096*** −0.070** 0.019 −0.010 −0.000 −0.014 −0.058***
(0.030) (0.025) (0.036) (0.035) (0.033) (0.038) (0.064) (0.043) (0.024) (0.021)
regime2 0.000 0.000 0.001 0.000 0.001 0.000 0.001 0.001** −0.000 0.000
(0.000) (0.000) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000) (0.000)
regime3 0.133*** 0.067*** 0.000 0.000 0.000 0.001 −0.000 −0.000 0.041*** 0.000
(0.018) (0.015) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.015) (0.000)
regime4 0.000 0.103*** 0.130*** −0.001 0.000 0.217*** 0.236*** 0.079***
(0.000) (0.028) (0.027) (0.001) (0.001) (0.040) (0.029) (0.016)
regime2*ret_CRUDOILP 0.067*** 0.310*** 0.248*** 0.137*** 0.121*** 0.263*** 0.247*** 0.162***
(0.015) (0.028) (0.027) (0.025) (0.030) (0.064) (0.043) (0.016)
regime3*ret_CRUDOILP 0.001 0.296*** 0.209***
(0.001) (0.027) (0.030)
regime4*ret_CRUDOILP 0.000 0.338*** 0.243***
(0.001) (0.033) (0.041)
mon −0.000 0.001* −0.001 −0.001* −0.000 −0.001 −0.003** −0.002* 0.001 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
tue −0.001 0.001 −0.001 −0.002** −0.001 −0.001* −0.002 −0.001 0.001 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
wed −0.001 −0.000 −0.002** −0.001 0.000 −0.001 −0.001 −0.000 0.000 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
thu −0.001** −0.000 −0.002*** −0.002*** −0.001 −0.001 −0.002* −0.001 −0.000 −0.001

(continued )
fluctuations
and currency
Stock returns

Table IV.
985
 MF
41,9

986

Table IV.
UCOPP UCVXP UHESP UMROP UMURP USUNP UTSOP UVLOP UXOMP Oil_Gas_Sector
AR(2) AR(5) AR(2) AR(5) AR(2) AR(1) AR(1) AR(2) AR(8) AR(2)

(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
intercept 0.001 −0.000 0.001 0.001 0.000 0.001 0.001 0.000 −0.000 0.001
(0.000) (0.000) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000) (0.000)
n 5105 5102 5105 5102 5105 5106 5106 5105 5099 5037
Adj. R2 0.37 0.42 0.40 0.37 0.37 0.28 0.19 0.28 0.42 0.56
AIC 14297.25 15142.95 13388.61 13444.83 13842.83 13047.23 10365.67 12374.70 15364.30 15811.13
BIC −28568.49 −30253.90 −26747.22 −26853.66 −27651.65 −26062.46 −20703.34 −24719.41 −30690.61 −31592.26
DW −28483.50 −30149.30 −26649.15 −26735.99 −27540.50 −25957.85 −20611.81 −24621.34 −30566.41 −31494.39
Q(5) 2.018 1.972 2.029 2.023 2.017 2.008 2.012 2.038 1.934 1.970
n 7.652 8.162 4.079 5.646 7.947 7.403 1.141 6.652 9.874* 16.509***
[0.176] [0.148] [0.538] [0.342] [0.159] [0.192] [0.950] [0.248] [0.079] [0.006]
Notes: This table reports OLS regressions for each oil firm. AR(p) shows p order of autoregressive term used in each estimated models. Descriptions of variables are presented in Table I. Regime2, regime3 and
regime4 are dummy variables indicating breaking periods and uniquely identified for each oil and gas companies, and the sector. AIC and BIC are Akaike and Bayesian information criteria, respectively. DW is
Durbin-Watson statistic. Q(5) is Ljung-Box Q-test for residual autocorrelation up to 5 lags. Standard errors are in parentheses and reported below coefficients. p-values for Ljung-Box Q-tests are in brackets.
***,**,*Statisticaly significant at the 1, 5 and 10 percent levels, respectively
According to Table IV(a) with the USD against major currencies as exchange rate in (1), Stock returns
the β coefficients of market returns are positive and significant across all firms ranging and currency
from 0.739 (Murphy Oil) to 1.132 (Tesoro), which has the highest exposure to market
risk. Our results also show positive and significant β coefficients (at varying
fluctuations
significance levels) of oil price returns across all firms except for Sunoco. These
findings, varying from a low coefficient of 0.043 (at 10 percent significance level) for
Valero Energy to 0.150 (at 1 percent significance level) for Chevron, are consistent with 987
previous literature. Similar to individual oil and gas companies, the value-weighted oil
sector is significantly and positively influenced by oil price movements. In Table IV(a),
β coefficients of oil price return only show “default” impacts of oil price fluctuation on
oil and gas companies. One wants to examine the overall impact across time would
have to look into the β coefficients of the interaction terms. For instance, Sunoco sustains
an insignificant impact caused by oil price movements; however, the impact becomes
significant towards recent regimes as β coefficients of regime2*ret_CRUDOILP,
regime3*ret_CRUDOILP and regime4*ret_CRUDOILP are significant (all at the
1 percent significance level). Interestingly, there are increases in the influence of oil
price fluctuations on oil and gas companies as the β coefficients of the interaction terms
increase their magnitude over time. This trend is clearly apparent in the case of Murphy
Oil as well, when its β coefficients of regime2*ret_CRUDOILP, regime3*ret_CRUDOILP
and regime4*ret_CRUDOILP are 0.133, 0.277 and 0.295 (all significant at 1 percent
significance level), respectively.
The fact that an appreciation in the US dollar value adversely affects oil and gas
firm’s stock returns is observed in Table IV(a). Being multinational corporations with
strong exporting activities, an appreciation of the US dollar makes their exporting
goods more expensive in terms of foreign currencies, thus adversely affecting the
demand and sale revenues from foreign countries. These companies may also be
strong in importing machineries and capital equipment, which will increase when
the value of the USD gets stronger. The finding of the negative coefficient on the
exchange rate in Table IV(a) suggests that the net effect of these two forces is
negative. Therefore, these companies’ stock returns (and the whole sector) will fall
when the US dollar appreciates against the basket of major currencies[6]. The details
are shown in Table IV(a), when the dollar strengthens against major foreign
currencies, stock returns fall substantially for the seven out of nine companies
studied (except for Sunoco and Tesoro): Hess is most affected by −0.410 and Exxon
Mobil is least affected by −0.107. Overall, the explanatory variables in (1) explain
from 19 percent of the variance in stock returns of Tesoro to 43 percent in Exxon
Mobil and 56 percent for the whole sector. The Durbin-Watson d-statistics and
Ljung-Box Q-test reported in Table IV(a) indicate no serious serial correlation
problems other than for Exxon Mobil at the 10 percent level and for the whole sector
at the 1 percent level.
The other β-coefficients (and diagnostics) do not change much when the bilateral
exchange rate is used instead of the major index in Table IV(b). However, the exchange
rate sensitivity is much weaker when the bilateral exchange rate is used. For
Conocophillips, Chevron, Hess, Marathon Oil and Murphy Oil we find negative and
statistically significant coefficients (at various significance levels) for ret_JYEN_US.
As the dollar strengthens against the yen, stock returns fall moderately (from a low
coefficient of −0.058 in the sector or −0.065 in Conocophillips to a high of −0.096
in Marathon Oil) in five out of the nine companies studied. We interpret this finding
as the Japanese yen containing something else than the simple hedge-interpretation.
MF It is known that the yen has been the currency of carry trade for some time and that
41,9 an appreciation of the yen usually comes in period of global turmoil. In Figure 1(c),
the USD appreciated strongly against major currencies during the 2008-2009 financial
crisis but only slightly against the JPY. Stocks of oil companies fall when the
USD strengthens against the index, reflecting the exporting exposure of major
US oil companies. On the other hand, the response is more mixed with respect to the
988 value of the yen.
The change_spread coefficients yield interesting results across firms in Table IV(a)
While Conocophillips, Chevron and Exxon Mobil show negative (−0.572, −0.548 and
−0.545, respectively) and statistically significant coefficients for the change_spread
variable, Tesoro and Valero Energy show positive (1.432 and 0.798, respectively) and
significant (at the 5 and 10 percent significant level, respectively) coefficients.
Intuitively, the indicator of how the long-end of the Treasury curve is valued against
the short (ten year T-note minus three-month T-bill) boosts up firm’s stock returns in
the case of Tesoro and Valero Energy, the riskiest of companies as discussed in
Table I according to their standard deviations of returns. However, it operates in reverse
for Conocophillips, Chevron and Exxon Mobil. These three (bigger) companies with
lower standard deviation in returns than the others do not benefit when the yield curve
spread increases. Rather, their stock returns decrease when the change_spread moves up.
When Chen et al. (1986) regressed a sample of assets (US equities grouped into
portfolios based on size) on macro factors on monthly data from 1958 to 1984, they
reported negative coefficients on the term spread. Their interpretation for the
negative coefficient was that stocks whose returns are inversely related to increases
in long rates over short rates are, ceteris paribus, more valuable. Using the same
reasoning, Conocophillips, Chevron and Exxon Mobil carry a negative risk premium
because when the term spread decreases (the long-term real interest rate is falling),
investors want protection against this and place a relatively higher value on assets
whose price increases when long-term real rates decline. On the other hand, Tesoro
and VALERO have positive coefficients because the valuations of these stocks are
directly related to the term spread.
As controlling for breaks in the return series, all regime variables are statistically
insignificant in explaining each of return series except for second regime of
VALERO which shows a coefficient of 0.001 (significant at 10 percent level).
On average, stock returns of VALERO increase 1 basis point during period January
28, 1999 to February 20, 2009 as comparing with those during period before
January 28, 1999. The results are robust regardless of the uses of ret_USD_major or
ret_JYEN_US. As controlling for day of the week effect, coefficients of mon, tue, wed,
thu shows some level of significance across firms. According to Table IV(a), while
Murphy Oil, Tesoro and VALERO show negative (−0.001, −0.003 and −0.002,
respectively) and statistically significant (at the 10, 5 and 10 percent, respectively) for
mon variable, Chevron shows positive (0.001) and significant (at the 10 percent
significant level). In addition, the stock returns on Thursday are significantly lower
for Conocophillips (−0.001 at 5 percent significant level), Hess (−0.002 at 1 percent
significant level), Marathon Oil (−0.002 at 1 percent significant level) and Tesoro
(−0.002 at 10 percent significant level). These results confirm day of the week effects
in several firms’ returns as documented before by Gibbons and Hess (1981), although
the coefficients are very small. On the other hand, when the value-weighted return of
oil and gas sector is used, there is no evidence of day of the week effect, which has
been already noted by Gibbons and Hess (1981): “the aggregation of returns
into portfolios, however, may zero out the day of the week effects in market-adjusted Stock returns
returns” (p. 595). and currency
Table V breaks oil price returns into two series: positive changes in oil price
(ret_CRUDOILP_up) and negative changes in oil price (ret_CRUDOILP_down) to
fluctuations
examine asymmetric effects on stock returns. According to Table V, decreases in oil
prices affect the oil and gas firm returns more severely than increases in oil prices. To
explain this result from a financial viewpoint, assuming that an increase in oil price is 989
viewed as good news for these companies (and a decrease in oil price is viewed as bad
news), the reaction of stock price to unfavorable news tends to be stronger than the
reaction to favorable news. Brown et al. (1988) argue that, after unfavorable financial
news both the risk and expected returns of companies increase systematically, and
thus their stock prices react more strongly to bad news than to good news. To test for
statistically different β coefficients of ret_CRUDOILP_up and ret_CRUDOILP_down,
we use the Wald test. Their p-values are consistently significant at the 1 percent
level, thus rejecting the null hypothesis of similar ret_CRUDOILP_up and
ret_CRUDOILP_down effects across all firms. The results for the other variables are
similar to those reported in Table IV(a) and (b).
Since the omission of important variables may result in a biased estimation,
we examine whether lagged explanatory variables are able to provide important
information to increase the power of regressions. In a table available upon request, we
re-run the Equation (1) with additional lagged variables of ret_CRUDOILPI,
ret_USD_majort and change_spread[7]. The results are mainly unchanged and
yield some interesting points. β coefficients of the lagged ret_CRUDOILPI variable
show positive and significant (at various significance levels) for eight out of
ten specifications although the magnitude of the β coefficients is as small as
approximately 10 percent of those of ret_CRUDOILPI variable. For instance, in
Chevron the β coefficient for the lagged ret_CRUDOILPI is 0.018 (significant at
5 percent significance level) in comparison with 0.150 (significant at 1 percent
significance level) as the β coefficient of ret_CRUDOILPI. Tesoro and VALERO
are companies whose stock returns are not explained by the lag of oil price return.
In addition, lagged variables of ret_USD_major and change_spread show no
significance in explaining the companies’ stock returns except for Conocophillips
whose β coefficient of lagged ret_USD_major is −0.103 and significant at 5 percent
significance level. Overall, the incorporation of lagged explanatory variables in the
models does not improve adjusted R2 nor the serial correlation tests. In fact, for
Chevron (UCVXP) it worsens with Q(5) displaying a new p-value of 0.072. Further, for
Exxon Mobil (UXOMP) and whole sector, the p-values of Q(5) become 0.034 and 0.002,
which are both worse than those reported in Table IV(a).
In another table available upon request, we check the robustness of the estimations
above to the aggregate market index. Performing the same estimations using the
returns of the WILSHIRE consisting of 5,000 companies as the market, our results are
qualitatively unchanged. Perhaps the only important difference is that the impact of
change_spread becomes significant in CONOCO PHILIPPS at the 10 percent level. With
WILSHIRE as the market index, increases in the term spread, other things equal, imply
a decrease in stock returns for three oil companies.

5. Concluding remarks
Our empirical models explain from 19 to 43 percent of the variation in stock returns of
nine major US oil companies, using the price of oil, the value of the USD against major
 MF
41,9

990

Table V.

USD index
down prices:
The impact of oil

Equation (3) with

prices on oil firms
when oil prices are
divided into up and
UCOPP UCVXP UHESP UMROP UMURP USUNP UTSOP UVLOP UXOMP Oil_Gas_Sector
AR(2) AR(5) AR(2) AR(5) AR(2) AR(1) AR(1) AR(2) AR(8) AR(2)

ret_SPCOMPPI 0.772*** 0.752*** 0.914*** 0.918***

0.770*** 0.852*** 1.156*** 0.934*** 0.750*** 0.821***
(0.018) (0.015) (0.021) (0.021)
(0.019) (0.022) (0.038) (0.025) (0.014) (0.013)
ret_CRUDOILP_up 0.175*** 0.147*** 0.278*** 0.214***
0.225*** 0.121*** 0.165*** 0.177*** 0.121*** 0.185***
(0.015) (0.013) (0.019) (0.018)
(0.017) (0.020) (0.033) (0.023) (0.012) (0.011)
ret_CRUDOILP_down −0.220*** −0.188*** −0.293*** −0.243***
−0.275*** −0.217*** −0.198*** −0.234*** −0.142*** −0.213***
(0.015) (0.013) (0.018) (0.018)
(0.017) (0.019) (0.032) (0.022) (0.012) (0.011)
change_spread −0.482 −0.492* 0.456 0.203
−0.049 0.325 1.514** 0.843* −0.515** −0.219
(0.300) (0.253) (0.360) (0.355)
(0.329) (0.384) (0.648) (0.438) (0.242) (0.215)
ret_USD_major −0.296*** −0.260*** −0.510*** −0.396***
−0.468*** −0.132** −0.225** −0.310*** −0.123*** −0.263***
(0.048) (0.040) (0.057) (0.056)
(0.052) (0.061) (0.102) (0.069) (0.038) (0.034)
regime2 0.000 0.000 0.000 0.000
0.001 0.000 0.001 0.001* −0.000 0.000
(0.000) (0.000) (0.001) (0.001)
(0.001) (0.001) (0.001) (0.001) (0.000) (0.000)
regime3 0.001 0.000
0.001 0.000 −0.000 −0.000 0.000
(0.001) (0.001)
(0.001) (0.001) (0.001) (0.001) (0.000)
regime4 −0.001 0.000
(0.001) (0.001)
mon −0.000 0.001** −0.001 −0.001* −0.000 −0.001 −0.003** −0.002* 0.001 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
tue −0.001 0.001 −0.001 −0.002** −0.001 −0.001 −0.002 −0.001 0.001 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
wed −0.001 −0.000 −0.002** −0.001 0.001 −0.001 −0.001 −0.000 0.000 −0.000
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
thu −0.001* −0.000 −0.002** −0.002*** −0.001 −0.001 −0.003* −0.001 0.000 −0.001
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000)
intercept 0.001* 0.000 0.001 0.001* 0.000 0.001 0.002 0.001 0.000 0.001*
(0.001) (0.000) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.000) (0.000)
n 5102 5102 5105 5102 5105 5106 5106 5105 5099 5037
Adj. R-squared 0.37 0.42 0.39 0.37 0.36 0.27 0.19 0.27 0.43 0.55
AIC −28523.22 −30271.47 −26681.68 −26813.69 −27574.46 −26022.43 −20677.27 −24671.99 −30694.55 −31546.99
BIC −28405.55 −30166.87 −26583.61 −26696.02 −27476.39 −25937.44 −20598.81 −24580.46 −30570.35 −31442.59
DW 2.016 1.963 2.026 2.031 2.017 2.011 2.018 2.044 1.93 1.97
Q(5) 8.367 8.981 4.489 7.275 8.753 7.169 1.322 6.881 10.386* 19.159***
[0.137] [0.110] [0.481] [0.201] [0.119] [0.208] [0.933] [0.230] [0.065] [0.002]
Wald test 497.162*** 507.973*** 726.962*** 477.51*** 664.924*** 223.792*** 90.457*** 254.315*** 341.993*** 991.45***
[0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000] [0.000]
Notes: See notes to Table IV. Wald tests are reported for coefficient restrictions testing symmetric oil price return effects. p-Values are in brackets
currencies (or the Japanese yen), and the term spread of US yield curve, as well Stock returns
as other controls. Our data dependent procedures result in good specifications and currency
throughout. Daily oil prices have always a positive effect on the returns of oil
companies, as documented before for monthly data by Mohanty and Nandha (2011).
fluctuations
In contrast to their study, we employ daily data and our longer two decade span
includes the last global financial crisis. We also reexamine exchange rate effects
in major oil and gas companies and capture in sequence two major sources of 991
asymmetries. First, the conjecture that stock returns respond differently to daily
upward or downward movements of crude oil, which is found to be the case. Second,
when we allow for interactive terms between the oil price return and regime dummies
variables, we find increasing effects of oil price movements on oil and gas companies’
stock returns over time.
We also find that oil companies all benefit from a weaker US dollar, reflecting their
exposure to trade and the possibility that investors wishing to hedge against a
weakening USD invest in US oil companies. Over the past decade, the US dollar (USD)
has weakened both against major currencies and against the yen with both exchange
rates correlating negatively with the WTI oil prices. On the term spread, while stock
returns at the aggregate respond positively to the term spread (when the spread
increases, returns increase), oil companies vary: CONOCOPHILIPS, Chevron and
Exxon Mobil carry a negative risk premium and Tesoro and VALERO carry positive
risk premium coefficients.
We acknowledge that important factors are omitted in the models. Major oil
companies tend to buy smaller companies or specific assets of other companies, which
may lead to occasional jumps in their stock prices. Another factor not captured herein
is the use of stock buybacks by oil companies, as far as they create demand for the
stock and reduce the share count, which has been particularly important for Exxon
Mobil (Denning, 2013). These topics are left for future research.

Notes
1. HollyFrontier, for example, follows from the merger between Holly Corporation and Frontier
Oil in July of 2011. CVR Energy and Western Refining both have less data due to their shorter
historical trading time periods.
2. Three of these companies appeared in the 20 largest oil companies in the world as listed
by Smith (2009) based on 2007 production: Exxon Mobil (fifth place), Chevron (14th place),
and Conoco Phillips (15th place). In many emerging-markets the large oil companies
have 100 percent state ownership, such as in: Pemex (Mexico), CNPC (China), or PDV
(Venezuela).
3. When incorporating dummy variables, we always exclude the base cases. For example,
in the case of weekday, we incorporate all weekday dummies but Friday. By doing so,
we acknowledge that beta coefficients of weekday dummies will be interpreted
relatively to those of Friday. Similar for the case of regimes, we ignore the very first
regime dummies.
4. A similar equation to (1) is estimated for each equity market index such as S&P 500, Dow
Jones and NASDAQ as dependent variable with change_CBOEVIXPIt capturing changes in
CBOE VIX at time t and omitting the market variable as independent variable. These results
are omitted for space constraints.
5. We thank an anonymous reviewer for this insightful suggestion.
MF 6. The literature provides some examples, although only for the whole oil and gas sector index
of stock returns and also for an earlier time period. For example, in Sadorsky (2001) Canadian
41,9 oil and gas companies which import machinery and equipment from the USA and borrow
money outside Canada are found to be worse off financially with the falling CAD. On the
other hand, our results are consistent with El-Sharif et al. (2005), who analyze the same
relationship for the UK oil and gas sector index of stock returns and report a stronger pound
leading to lower stock returns.
992
7. We thank an anonymous reviewer for this insightful suggestion.

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Corresponding author
Khoa H. Nguyen can be contacted at: khnguyen1@utpa.edu

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