Oil price uncertainty and cash holdings: Evidence from China

This study investigates the impact of oil price uncertainty on the cash holdings of firms. Using a sample of the Chinese stock market for the period from 2007 to 2016, our empirical results show that the impact of oil price uncertainty on cash holdings exhibits an inverted U-shape. Cash holdings increase with oil price uncertainty, but after a point, this impact becomes negative. Moreover, we find that the effect of oil price uncertainty is mitigated as the market value of firms increases. Meanwhile, state-owned companies are less impacted by oil price uncertainty. The results are robust to various tests and alternative explanations. Our findings are consistent with real options theory and pecking order theory.     

Oil price uncertainty and unemployment

In this study, we empirically search the effects of oil price uncertainty and oil price shocks on U.S. unemployment rate using a GARCH-in-mean VAR model for the period 1974:q2–2017:q4. Based on our findings, we show that oil price uncertainty significantly increases unemployment rate in the U.S. economy. Likewise, our impulse-response analysis affirms that a positive oil price shock increases unemployment while the response of unemployment to a negative oil price shock is negative. Moreover, we reveal that unemployment rate reacts to positive and negative shocks asymmetrically. More specifically, the response of unemployment to negative oil price shocks is negative and slighter in size. Besides, oil price uncertainty is found to magnify the rise in the U.S. unemployment rate. These findings are in keeping with the real options theory which reveals that the uncertainty about goods' prices leads firms to postpone or abandon their production and investment and they seem to be robust to the use of different real oil price measures.     

Crude oil price uncertainty and corporate investment: New global evidence

Using a comprehensive dataset of more than 33,000 firms from 54 countries in the period 1984–2015, we show that crude oil price uncertainty negatively influences corporate investment. More importantly, the effect is dependent on the market and stock characteristics of the firms. In addition, we discover that the effect is stronger in the crude oil producers group than for crude consumers. Our analysis reveals that the global financial crisis and market volatility phases significantly affect this relationship. Our results survive a range of robustness tests.     

The effect of oil and stock price volatility on firm level investment: The case of UK firms

Crude oil price behaviour has become more volatile since 1973 which has a significant impact on macroeconomic variables such as GDP, inflation and productivity. Studies considering the effects of oil price changes on decisions at the firm level are comparatively few. Oil price volatility represents a source of uncertainty for firm profitability, valuations and investment decisions. This study examines the effects of industry uncertainty and market instability on total investment expenditures in UK firms. Generalized method of moments estimation techniques are applied to a panel data set of UK firms over the period 1986–2011. Tobin′s Q theory is applied to estimate the investment model, which is augmented with measures for both macroeconomic and industry specific uncertainty. Stock price uncertainty seems to be positively related to investment. On the other hand, there is a U shaped relationship between oil price volatility and firm investment. The results will be useful to decision makers, investors, managers and policy makers who need to make investment decisions in an uncertain world.     

Relative energy price and investment by European firms

A dynamic model of investment is estimated with data on non-financial firms in 15 European countries across 25 industries over 1991–2006. A rise in real energy price reduces the degree of persistence in the investment adjustment cost function. Panel results suggest that in manufacturing a 1% rise in real energy price reduces investment by a country's firms by 1.9% relative to that by firms in other countries with a smaller effect for non-manufacturing firms. The negative effect of a higher relative price of energy on firm-level investment is significantly less marked the larger the firm. Results imply that stabilizing the relative price of energy would steady firm investment with greater gains in stability at smaller and medium sized firms. Results are robust to consideration of country business cycle effect and firm leverage. Estimation of investment is based on the Euler equation approach with over 21,000 observations. Individual country regressions imply that a rise in the relative price of energy price has a statistically significant negative effect on firm-level investment in 14 out of 15 countries. To avoid dynamic panel bias estimation is by generalized method of moments with instrumental variables.     

Does crude oil price play an important role in explaining stock return behavior?

Employing the MS-ARJI-GJR-GARCH-X model, in which the parameters for the jump process, the asymmetric GARCH effect and the impacts of oil price shocks are regime-dependent, this paper analyzes the impact of crude oil price shock on stock return dynamics. Empirical results reveal three interesting findings. First, incorporating the asymmetric GARCH effect and the oil price shock can substantially improve fitting ability. Second, the GARCH and jump components show very different behaviors during turbulent and stable periods. Third, the effects of current and past oil price shocks differ. The conditional mean, mean of jump size and variance of jump size immediately respond to a current oil price shock. A one-period lagged oil price shock, no matter whether positive or negative, can affect the transition probability that the stock market will remain conditional in the next period. Moreover, the effects of lagged positive and negative shocks on transition probabilities are very different.     

An event study analysis of oil and gas firm acreage and reserve acquisitions

We examine the impact of the announcement of acquisition of oil and gas acreage and reserves on the share price of US listed oil and gas firms. While there is evidence of information asymmetry related differences in the share market reaction on announcement of acquisition of acreage or reserves, we also identify greater sensitivity to crude oil price volatility for acreage acquisitions, consistent with the creation of valuable real options on acquisition of acreage. This is not evident to the same extent with acquisition of reserves. For example, acreage investment announcements reveal a statistically significant 1.22% premium (3-day CAR) in periods of high crude oil volatility compared with periods of low volatility. The premium on reserve acquisitions across these periods is a statistically insignificant 0.12%. This is supported in a multiple regression setting, with share price sensitivity to crude oil price volatility being higher for acreage acquisitions than for reserve acquisitions. Our sample consists of 1391 separate acreage or reserve acquisition announcements made by oil and gas firms listed on the U.S. equity market over the period from 1992 to 2011.     

Oil price shocks,competition, and oil & gas stock returns — Global evidence

Extant literature suggests that oil price shocks have a strong impact on the macroeconomy and the stock market. However, relatively less is known about the effect of country-level determinants, competition, and asymmetrical relationship in affecting the oil & gas stock return at the firm-level. Using a comprehensive firm-level monthly data from 70 countries spanning 1983 to 2014, we find: (i) macroeconomic stress negatively impact firm-level returns; (ii) oil price shocks positively impact firm-level returns; (iii) firms located in high oil producing countries are more sensitive to global uncertainty and oil price shocks; (iv) firms located in non-competitive industries are less sensitive to oil price shocks; and (v) firms located in non-competitive industries are less affected by the drop in oil price, as compared to firms that are located in highly competitive industries. Our results remain qualitatively similar using a battery of robustness checks.     

Impact of oil price change on airline's stock price and volatility: Evidence from China and South Korea

Generally, the influence of crude oil price on the industries (enterprises) varies because they have different levels of reliance on crude oil. For airlines, the expenditure on fuel accounts for a considerable proportion of their gross costs; thus, airlines are unusually sensitive to changes in the crude oil price. The discussion on the relationship between crude oil price and airlines will help the airlines improve their ability to cope with the crude oil price risk. In addition, the responses of South Korean and Chinese airlines in the event of a price shock, that take, are also very important as the airplane is a basic form of transportation in many countries. This study investigates the impact of three crude oil price (WTI, Brent, Dubai) change on the stock price and volatility of four airlines (Korean Air, Asiana Airlines, Air China, and China Eastern Airlines) using VAR-GARCH-BEKK model. The main findings are as follows. There is return and volatility spillover effect between crude oil price and the stock prices of airlines. The volatility spillover effect between the crude oil price and airlines' stock price is more significant than the return spillover effect. Compared with the transportation industry, the stock prices of smaller airlines of South Korea and China are relatively more sensitive to the change in oil price. In addition, compared with Korea's airlines, China's airlines are influenced more by the oil price change, implying that spillover effects owing to oil price are closely related to the different characteristics of the air transport markets of the two countries.     

Oil price uncertainty in Canada

Bernanke [Bernanke, Ben S. Irreversibility, uncertainty, and cyclical investment. Quarterly Journal of Economics 98 (1983), 85–106.] shows how uncertainty about energy prices may induce optimizing firms to postpone investment decisions, thereby leading to a decline in aggregate output. Elder and Serletis (Elder, John and Serletis, Apostolos. Oil price uncertainty. http://ssrn.com/abstract=908675 (2009).] find empirical evidence that uncertainty about oil prices has tended to depress investment in the United States. In this paper we assess the robustness of these results by investigating the effects of oil price uncertainty in Canada. Our results are remarkably similar to existing results for the United States, providing additional evidence that uncertainty about oil prices may provide another explanation for why the sharp oil price declines of 1985 failed to produce rapid output growth. Impulse-response analysis suggests that uncertainty about oil prices may tend to reinforce the negative response of output to positive oil shocks.     

Assessing the impact of oil prices on firms of different sizes: Its tough being in the middle

Recent empirical research has found evidence of a relationship between oil price movements and stock prices. Most published research investigates the relationship between oil price movements and stock prices using either economy-wide measures of stock prices or industry sector measures of stock prices. An important question that has largely gone unanswered relates to the relationship between oil prices and stock prices when the size of firms is allowed to vary. Relative to large firms, do oil price movements have larger or smaller impacts on the stock prices of small- or medium-sized firms? The answer to this question could have important policy implications that affect economic growth and prosperity. In this paper, a panel of firms is followed over a 17-year period to investigate the relationship between oil price movements, firm size, and stock prices. Evidence is found that shows the relationship between oil price movements and stock prices does vary with firm size and the relationship is strongest for medium-sized firms.     

Connectedness of economic policy uncertainty and oil price shocks in a time domain perspective

In this paper, we investigate causality and connectedness between economic policy uncertainty and oil price shocks across time scales. By incorporating the wavelet approach into the structural vector autoregression (VAR) framework proposed by Diebold and Yilmaz (2009, 2012, 2014), we find that crude oil prices behave like receivers of information from economic policy uncertainty, regardless of time scale. However, the causality relationship between economic policy uncertainty and oil price shocks intensifies as time scales increase. In addition, the connectedness relationship is robust to time scale changes, whereas the causal relationship intensifies as time scales increase. Notably, the weight of US economic policy uncertainty increases in the VAR system as time scales increase. In particular, we employ the West Texas Intermediate (WTI) crude oil price as an alternative measure to increase the robustness of our results and identify differences in the VAR system. Overall, the total connectedness of the WTI crude oil price is lower than that of the Brent crude oil price, regardless of time scale. Our results provide meaningful information for both investors and policymakers.     

Crude oil price forecasting: a biogeography-based optimization approach

The importance of crude oil in the world economy has made it imperative for efficient models to be designed for predicting future prices. This paper proposes an alternative approach based on a time series and biogeography-based optimization (BMMR–BBO) for the estimation of the West Texas Intermediate (WTI) crude oil price. To evaluate the forecasting ability of the presented model, we compared its performance with those of time series functions. The results of the experiment showed that BMMR-BBO performed better than the other methods and is a fairly good option for crude oil price prediction. The proposed model can be useful in the formulation of policies related to international crude oil price estimations, development plans, and industrial production.     

Pricing the (European) option to switch between two energy sources: An application to crude oil and natural gas

We consider a firm, which can choose between crude oil and natural gas to run its business. The firm selects the energy source, which minimizes its energy or production costs at a given time horizon. Assuming the energy strategy to be established over a fixed time window, the energy choice decision will be made at a given future date T. In this light, the firm's energy cost can be considered as a long position in a risk-free bond by an amount of the terminal oil price, and a short position in a European put option to switch from oil to gas by an amount of the terminal oil price too. As a result, the option to switch from crude oil to natural gas allows for establishing a hedging strategy with respect to energy costs. Modeling stochastically the underlying asset of the European put, we propose a valuation formula of the option to switch and calibrate the pricing formula to empirical data on a daily basis. Hence, our innovative framework handles widely the hedge against the price increase of any given energy source versus the price of another competing energy source (i.e. minimizing energy costs). Moreover, we provide a price for the cost-reducing effect of the capability to switch from one energy source to another one (i.e. hedging energy price risk).     

Oil price uncertainty and U.S. employment growth

This paper studies the effects of oil price changes on U.S. aggregate and sectoral employment growth in the presence of time-varying oil price uncertainty. We estimate a bivariate GARCH-in-Mean VAR model using U.S. monthly data of oil prices and employment growth for the period 1974 m2:2018 m11. Based on the results, we show that an increase in oil prices reduces total employment growth and that in most private sectors, but the public sector is largely unaffected. The effects on employment growth in various ”hub” sectors are also different. Furthermore, employment growths at both aggregate and disaggregate levels respond asymmetrically to positive and negative oil price shocks, which could possibly be attributed to oil price uncertainty. This asymmetric impact is more evident when the model is estimated on the entire sample than on the 1970s sample, implying that the role of oil price uncertainty in accounting for variations in employment growth can differ over time. These findings underline the empirical relevance of oil price uncertainty for the U.S. labor market dynamics.     

Crude oil futures trading and uncertainty

This paper examines the effect of different dimensions of uncertainty on expectations of WTI crude oil futures momentum traders at a daily level. We consider two concepts of uncertainty and two momentum trading indicators based on technical analysis. In addition, we also use wavelet techniques to decompose crude oil futures prices into different frequencies accounting for investors' sentiment at various horizons. To allow for different effects on the propagation mechanism of uncertainty shocks, we apply a time-varying Bayesian VAR approach. Our findings indicate that both measures of uncertainty affect momentum trading on the crude oil futures market in several periods, especially during the great recession between 2007 and 2009. For the decomposed futures prices our results also show that the reaction to uncertainty differs substantially across frequencies. High frequencies exhibit a very short-lived reaction to uncertainty while low frequencies show a persistent reaction to uncertainty shocks.     

Asymmetry in retail gasoline and crude oil price movements in the United States: An application of hidden cointegration technique

There is a common belief that gasoline prices respond more quickly to crude oil price increases than decreases. Some economists and politicians believe that asymmetry in oil and gasoline price movements is the outcome of a non-competitive gasoline market requiring that governments take policy action to address “unfair pricing”. There is no consensus as to the existence, or nature, of the asymmetric relationship between prices of gasoline and crude oil. Much of this literature specifies asymmetry in the speed of adjustment and short-run adjustment coefficients. In contrast, Granger and Yoon's [Granger, C.W. and Yoon, G. “Hidden Cointegration”, University of California, San Diego, Department of Economics Working Paper, (2002).] Crouching Error Correction Model (CECM) identifies asymmetry of the cointegrating vectors between components (cumulative positive and negative changes) of the series. Applying the CECM to retail gasoline and crude oil prices for the U.S., we find that there is only evidence of cointegration between positive components of crude oil prices and negative components of gasoline prices. In contrast to the literature which attributes asymmetric price movements to market power of refiners, these findings suggest that gasoline prices –in the long run– are more influenced by the technological changes on the demand side than crude oil price movements on the supply side.     

The asymmetric response of gasoline prices to oil price shocks and policy uncertainty

This study shows that the effect of oil price shocks on the real price of gasoline is interrelated with economic policy uncertainty. Economic policy shocks are linked with increased real price of gasoline and reduced consumption of gasoline. There is evidence that the fluctuation of both real gasoline prices and of gasoline consumption is associated with uncertainty of tax legislation expiration expectation as well as other components of economic policy uncertainty. Positive shocks to economic policy uncertainty have relatively larger effects on gasoline prices than do negative shocks to economic policy uncertainty. Economic policy uncertainty responds asymmetrically to increases and decreases in real oil price. Shocks to economic policy uncertainty account for 16.1% of variation in real gasoline prices and for 4.9% of variation in gasoline consumption in the long-run.     

Linkages between oil price shocks and stock returns revisited

In this paper, we revisit the debate on the relationship between oil price shocks and stock market returns by replicating the quantile-on-quantile (QQ) regression model for the US stock market in Sim and Zhou (2015, Journal of Banking and Finance), and extending it to 15 countries. The classification of these countries as oil importers or oil exporters depends on their net position in crude oil trade. Our results indicate that the main finding by Sim and Zhou (2015) that large negative oil price shocks can bolster stock returns when markets are performing well is only partially supported by the three largest oil importers in our sample – China, Japan and India – during the period 1988:1–2007:12. However, when extending the study to more recent data (period 1988:1–2016:12), we find that China and India experience higher returns when markets perform well and there is a large positive oil price shock. Also, large positive oil price shocks often lead to higher stock market returns when markets perform well for both oil exporting countries – Canada, Russia, Norway – and moderately oil dependent countries – such as Malaysia, Philippines and Thailand. In most cases large negative oil price shocks depress further already poorly performing markets, as in Sim and Zhou (2015). These findings highlight that the relationship between the distributions of oil price shocks and stock market returns is not stable over time in most countries studied. Furthermore, the asymmetric effect between positive and negative oil price shocks observed in the US market by Sim and Zhou (2015) is less evident in most countries for both the baseline and extended periods.     

Oil price risk and the Australian stock market

The primary aim of this paper is to investigate the sensitivity of Australian industry equity returns to an oil price factor over the period 1983–1996. The paper employs an augmented market model to establish the sensitivity. The key findings are as follows. First, a degree of pervasiveness of an oil price factor, beyond the influence of the market, is detected across some Australian industries. Second, we propose and find significant positive oil price sensitivity in the Oil and Gas and Diversified Resources industries. Similarly, we propose and find significant negative oil price sensitivity in the Paper and Packaging, and Transport industries. Generally, we find that long-term effects persist, although we hypothesize that some firms have been able to pass on oil price changes to customers or hedge the risk. The results have implications for management in these industries and policy makers and enhance our understanding of the “Dutch disease.”