Do oil futures prices predict stock returns?

I-Hsuan Ethan Chiang and W. Keener Hughen

Journal of Banking & Finance, 2017, vol. 79, issue C, 129-141

Abstract: This paper explores stock return predictability by exploiting the cross-section of oil futures prices. Motivated by the principal component analysis, we find the curvature factor of the oil futures curve predicts monthly stock returns: a 1% per month increase in the curvature factor predicts 0.4% per month decrease in stock market index return. This predictive pattern is prevailing in non-oil industry portfolios, but is absent for oil-related portfolios. The in- and out-of-sample predictive power of the curvature factor for non-oil stocks is robust and outperforms many other predictors, including oil spot prices. The predictive power of the curvature factor comes from its ability to forecast supply-side oil shocks, which only affect non-oil stocks and are hedged by oil-related stocks.

Keywords: Oil; Futures; Predictability; Curvature; Supply shocks; Futures curve (search for similar items in EconPapers)
JEL-codes: G12 G13 G17 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:79:y:2017:i:c:p:129-141

DOI: 10.1016/j.jbankfin.2017.02.012

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