Abstract
This study examines whether oil and gas risk factors are priced in the returns of Malaysian oil and gas stocks employing asset pricing model with improved version of Fama-MacBeth two-stage panel regression. The findings reveal that oil price risk, gas price risk, and exchange rate risk are priced factors in the returns of oil and gas stocks, alongside market-based risk factors. Oil price, gas price and exchange rate factors are found to be associated with positive risk premium implying that they are systematic risk factors in the Malaysian oil and gas industry. Investors demand compensation for exposure to changes in oil price, gas price and exchange rate, implying that the risk cannot be eliminated through diversification. The risk premium for common systematic risk factors such as market, book-to-market, and momentum factors are found to be negative. The results suggest that in the Malaysian oil and gas industry, momentum driven strategy produces negative returns and investors receive higher returns from investing in growth oriented oil and gas stocks. Our results offer implications for asset pricing and portfolio management.
Highlights
This study examines whether oil and gas risk factors are priced in the returns of Malaysian oil and gas stocks employing asset pricing model with improved version of Fama-MacBeth two-stage panel regression
We focus our discussions on the results presented in Table 5 employing Fama and MacBeth [26] two-step panel regression that include both the common risk factors and oil and gas risk factors as regressors to investigate whether oil price, gas price, and exchange rate factors are priced in the average stock returns of oil and gas industry after controlling for common risk factors
This study aims to investigate the extent to which oil and gas risk factors are priced factors in the Malaysian oil and gas stock returns by employing a novel approach of Fama-MacBeth two-stage panel regression
Summary
This study examines whether oil and gas risk factors are priced in the returns of Malaysian oil and gas stocks employing asset pricing model with improved version of Fama-MacBeth two-stage panel regression. Gas price and exchange rate factors are found to be associated with positive risk premium implying that they are systematic risk factors in the Malaysian oil and gas industry. The results suggest that in the Malaysian oil and gas industry, momentum driven strategy produces negative returns and investors receive higher returns from investing in growth oriented oil and gas stocks. To what extent industry-specific risk factors such as oil price, gas price, and exchange rate factors are priced in the returns of oil and gas stocks?. As highlighted in a recent study by Ramos et al [1], studies on the importance of industry-specific factors in asset pricing has been neglected except for the banking industry. The importance of natural gas has been highlighted in IEA’s [6] press release dated 7 June 2019 in the following excerpts: “Natural gas can contribute to a cleaner global energy system . . . 2018 was another golden year for natural gas, driven by China’s battle against air pollution . . . China is expected to account for more than 40% of global gas demand growth to 2024, propelled by the government’s goal of improving air quality by shifting away from coal.”
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