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

Abstract

This study explores Malaysian oil and gas stocks’ exposure to oil and gas risk factors, paying special attention to subindustry classification, stock size, book-to-market value, and volatility state. The study employs firm-level weekly frequency data of oil and gas firms and several multi-asset pricing models within a GARCH (1,1)-X and Markov-switching framework. The empirical findings reveal that oil price, gas price, and exchange rate exhibit positive effects on the stock returns of all oil and gas sub-industries, but they exhibit negative effects on gas utilities sub-industry stock returns. The empirical findings also reveal that the extent of this effect varies across sub-industry, stock size, book-to-market value, and volatility states. Thus, the findings suggest the existence of asymmetric, heterogeneous, and non-linear exposures.

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

“…In this end, we closely follow the mean semi-variance approach proposed by Estrada [15] and the underlying justifications for its application. At this instance, our study extends the literature that related to mean semi-variance framework (e.g., [15,21,22]) and oil and gas stock (e.g., [11,12,14,23,24,26,27]).…”

“…Thus, being an emerging and oil and gas exporting country, the Malaysian stock market is very much exposed to the volatility of oil price. However, the intensity of exposures is comparatively high on oil and gas industry stock because the operating costs and profits of oil and gas firms are conditional to the fluctuation of oil and gas prices [10][11][12][13][14]. Thus, the behavior of oil and gas stocks is different from that of other stocks at persistent volatility of oil and gas price.…”

“…Thus, the behavior of oil and gas stocks is different from that of other stocks at persistent volatility of oil and gas price. Therefore, the volatility in oil and gas stock returns come not only from the general stock market fluctuations but also from the oil price and gas price volatility [10][11][12]. Additionally, if the firm operates in a net oil and gas exporting country, exchange rate also plays an important role in influencing energy stock prices to be more volatile.…”

“…Additionally, if the firm operates in a net oil and gas exporting country, exchange rate also plays an important role in influencing energy stock prices to be more volatile. Moreover, oil and gas companies in Malaysia are price takers of international crude oil and gas prices [11,12]. Therefore, the cash flows and the stock prices of oil and gas companies are exposed to oil and gas price volatility [10][11][12][13][14].…”

“…Moreover, oil and gas companies in Malaysia are price takers of international crude oil and gas prices [11,12]. Therefore, the cash flows and the stock prices of oil and gas companies are exposed to oil and gas price volatility [10][11][12][13][14]. Consequently, the unpredictable nature of oil prices always creates uncertainty in the economy and the oil and gas industry's revenue generation.…”