Do Oil and Gas Risk Factors Matter in the Malaysian Oil and Gas Industry? A Fama-MacBeth Two Stage Panel Regression Approach

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.

The Effects of Oil and Gas Risk Factors on Malaysian Oil and Gas Stock Returns: Do They Vary?

“…The findings on the exchange rate risk factor indicate that the stock returns of all sub-industries are positively and differently affected by changes in exchange rate. These findings contribute to extending several important studies of related subject matters (e.g., [3,6,7,9,10,13,15,36]).…”

“…The oil and gas industry has a long value chain and firms within the industry do not operate similar business activities. There are generally several sub-industries in the oil and gas industry [3,18,37]. Therefore, the profit generation process of each sub-industry is not the same, even though all the sub-industries are connected with each other.…”

“…The oil and gas industry is no exceptional. The industry's business and stock performance are very much dependent on changes in oil and gas prices, because oil and gas are crucial inputs for many goods and services in the economy (see [2][3][4][5][6][7][8]). Lower prices of oil and gas reduce the input costs and expenses of oil and gas firms' business operations, thereby increasing corporate earnings and cash flows.…”

Impact of Credit Risk on Momentum and Contrarian Strategies: Evidence from South Asian Markets

“…Khan et al (2017) conducted a study to analyze the relationship between positive or negative market volatility and momentum profits and concluded a negative influence of market volatility on momentum profits. Hoque et al (2020) concluded that the momentum strategy generated negative returns, whereas investors expected high returns from the growth-oriented stock of oil and gas stocks in Malaysia. On the basis of the above literature, we develop the following hypotheses for our study:…”

Economic and Social Impacts of the Oil Industry on the Brazilian Onshore

“…This technique suits this research as it deals with both local and temporal data [12]. Panel regression modeling is advantageous over other methodologies in that it increases the amount of information present in the sample, the accuracy of the estimators, and the power of statistical tests [13].…”