Industry Risk Factors and Stock Returns of Malaysian Oil and Gas Industry: A New Look with Mean Semi-Variance Asset Pricing Framework

Mohammad Enamul Hoque,Soo-Wah Low

doi:10.3390/math8101732

Abstract

This study employs a mean semi-variance asset pricing framework to examine the influence of risk factors on stock returns of oil and gas companies. This study also examines how downside risk is priced in stock performance. The time-series estimations expose that market, size, momentum, oil, gas, and exchange rate have significant impacts on oil and gas stock returns, but effects are heterogeneous depending on an individual stock. The two-stage cross-section estimations provide new insights about investors’ risk-return trade-off when facing downside risks. The results show that downside risk exposures to market, momentum, oil, and exchange rate factors are negatively priced in the Malaysian oil and gas stocks. This implies that investors are penalized for their downside exposure to these risk factors, and such inference is consistent with the risk preference explanation of prospect theory. Liquefied natural gas (LNG) is the only risk factor found to be positively priced in the returns of oil and gas stocks. Additionally, we find a negative relationship between LNG factor and total risk. This suggests that as the risk exposure to LNG increases, the total risk decreases, implying that the LNG risk factor is an idiosyncratic risk and not a systematic risk factor. Such interpretation is consistent with the correlation result, which shows no association between LNG and the market risk factor.

Highlights

As stated in the U.S Energy Information Administration (EIA, hereafter) 2018 report [1], “Malaysia is the world’s third-largest exporter of liquefied natural gas, the second-largest oil and natural gas producer in Southeast Asia, . . . Malaysia’s energy industry is a critical sector of growth for the entire economy and has accounted for nearly 20% of the country’s total gross domestic product in recent years.” Malaysia has proven oil reserves of 4.0 billion barrels and natural gas reserves of 100.7 trillion cubic feet [1]
On the gas price (LNG) risk factor, while it is expected that gas price should exert a positive effect on the Malaysian energy-related stocks, the results show that changes in gas price significantly and positively impact the stock returns of only seven oil and gas firms
This study analyzed the effects of risk factors such as market, size, value, momentum, and several oil-related risk factors such as price changes of oil, liquefied natural gas (LNG), and exchange rate on oil and gas stock performance using the mean semi-variance framework of asset pricing

Summary

Introduction

As stated in the U.S Energy Information Administration (EIA, hereafter) 2018 report [1], “Malaysia is the world’s third-largest exporter of liquefied natural gas, the second-largest oil and natural gas producer in Southeast Asia, . . . Malaysia’s energy industry is a critical sector of growth for the entire economy and has accounted for nearly 20% of the country’s total gross domestic product in recent years.” Malaysia has proven oil reserves of 4.0 billion barrels and natural gas reserves of 100.7 trillion cubic feet [1]. Being an oil-exporting nation, oil price is an important risk factor and performance indicator for the Malaysian stock market, which has some influencing power to create volatilities in stock market returns. Many empirical studies have shown that the oil price uncertainties have created stock market volatilities in Malaysia (see [2,3,4,5], among others). Oil price is an important risk factor and performance indicator for the Malaysian stock market [5,6,7,8,9]. It can be believed that oil and gas price related factors have significant influences on the Malaysian economy and stock market

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Results

Conclusion