Abstract
We document a novel stock price momentum effect related to oil. A portfolio that buys low-oil-beta stocks and sells high-oil-beta stocks earns abnormal returns of -1.08% per month from 1986 to 2011, with majority of abnormal returns arising from 2002 to 2011, and 1.58% per month from 2012 to 2015. Our results are robust after controlling for size, value, asset growth, profitability, momentum, and total volatility in two-dimensional sorting, and after removing the oil price fluctuations that are driven by aggregate demand shocks. Oil beta is insignificant in forecasting future returns before 2002 in cross-sectional regressions and becomes significant since 2002. Our findings are consistent with the notion that investors underestimate the magnitude of the boom and bust of oil prices.
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