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A firm-level analysis of the upstream-downstream dichotomy in the oil-stock nexus

Swaray, Raymond; Salisu, Afees A.

Authors

Dr Raymond Swaray R.Swaray@hull.ac.uk
Senior Lecturer (Associate Professor) in Economics

Afees A. Salisu



Abstract

In this paper, we query whether the stock prices of nonintegrated firms in the upstream and downstream sectors of the global oil supply chain respond symmetrically to changes in oil prices. This inquiry relates to the “homogenous expectation” assumption among investors and fund managers pertaining to the returns and variances of assets of specialized firms operating in upstream and downstream sectors of the supply chain. Motivated by the Arbitrage Pricing Theory, we formulate a Panel Autoregressive Distributed Lag (PARDL) model, which explains the possible macroeconomic factors in the oil-stock nexus as well as any inherent persistence and heterogeneity effects due to large cross-sections and time. In accordance with the Shin et al. (2014) approach, a Nonlinear Panel ARDL model is also formulated to test for possible asymmetric responses of the nonintegrated oil firms to positive and negative changes in the oil price. Our findings indicate that the stock prices of upstream and downstream firms move in contrasting directions in response to changes in the benchmark crude oil prices in the long-run. Specifically, we show that the stock prices of upstream sector firms increased in response to an increase in oil prices, while the reverse holds for the stock prices of downstream firms. In the short run, returns on the stock of firms in both sectors increase following an increase in oil prices; however, downstream firms’ stock returns decreased in response to negative oil price shocks. The findings further show that both sectors respond differently to episodic changes in market conditions that emanated from the global financial crisis. However, upstream firms show a stronger response to changing market conditions than their downstream counterparts.

Citation

Swaray, R., & Salisu, A. A. (2018). A firm-level analysis of the upstream-downstream dichotomy in the oil-stock nexus. Global finance journal, 37, 199-218. doi:10.1016/j.gfj.2018.05.007

Journal Article Type Article
Acceptance Date May 27, 2018
Online Publication Date May 30, 2018
Publication Date Aug 1, 2018
Deposit Date Aug 13, 2018
Publicly Available Date Dec 1, 2019
Journal Global Finance Journal
Print ISSN 1044-0283
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 37
Pages 199-218
DOI https://doi.org/10.1016/j.gfj.2018.05.007
Keywords Stock price; Crude oil price; Price transmission; Portfolio management
Public URL https://hull-repository.worktribe.com/output/859861
Publisher URL https://www.sciencedirect.com/science/article/pii/S1044028318300553?via%3Dihub
Copyright Statement © 2018. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

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Publisher Licence URL
https://creativecommons.org/licenses/by-nc-nd/4.0/

Copyright Statement
© 2018. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/





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