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

This paper uses a multifactor model to examine the role of crude oil as a pricing factor in Australian excess industry returns over the period January 1980 to August 2006. A dynamic model is also specified to provide insights into the relationship between the stock market and past oil price movements. The macroeconomic factors comprise the market portfolio, oil prices, exchange rates and the term premium. The nine industries include banking, diversified financials, energy, insurance, media, property trusts, materials, retailing and transportation. The results indicate that oil prices are an important determinant of returns in the banking, energy, materials, retailing and transportation industries. The findings also suggest that the effects of oil price movements are persistent – retail excess returns, for example, are negatively related to current and one and three-month lagged oil price changes. Nonetheless, the proportion of variation in excess returns explained by the contemporaneous and lagged oil prices appears to have declined during the sample period.