A comparative analysis of oil as a risk factor in Australian industry stock returns, 1980‐2006

Purpose – This paper aims to examine the impact of crude oil prices on Australian industry stock returns. With rising energy prices, it is important to consider oil as a pricing factor in asset pricing models. Design/methodology/approach – Multifactor static and dynamic models consider crude oil and other macroeconomic factors as pricing factors in industry excess returns from January 1980 to August 2006. The macroeconomic factors comprise the market portfolio, oil prices, exchange rates and the term premium. The industries consist of banking, diversified financials, energy, insurance, media, property trusts, materials, retailing and transportation. Findings – Oil prices are an important determinant of returns in the banking, energy, materials, retailing and transportation industries. The findings also suggest oil price movements are persistent. Nonetheless, the proportion of variation in excess returns explained by the contemporaneous and lagged oil prices appears to have declined during the sample period. Research limitations/implications – Macroeconomic factors are important for multifactor asset pricing at the industry level. Apart from oil prices, the market portfolio is a significant pricing factor in all industry excess returns. Exchange rates are also an influential factor for excess returns in the banking and diversified financials industries, and the term premium as a proxy for future real activity is a priced factor in the energy, insurance and retailing industries. Originality/value – While past studies have provided some evidence that oil prices constitute a source of systematic asset price risk and that exposure varies across industries, no recent work is known in the Australian context.