Crude Oil Prices, Risk Preferences, and Intertemporal Variation in Market Expected Returns : Empirical Evidence from the Nigerian Stock Exchange (NSE)

This study finds crude oil prices (`oil prices') affect market or portfolio expected returns on the NSE only via inducement of changes to risk aversion parameters of the `representative agent' who has exposure to both stock market return volatility risk and oil price risk. I refer to this effect as the `risk' effect on stock returns. Independent of effects on risk aversion parameters, changes to oil prices do not have any direct, equivalently `demand' effect on market or portfolio returns. Prior studies of effects of oil prices on stock returns test for presence of the demand effect, but do not allow for possibility of inferring of the risk effect. Given the empirical framework in this study embeds the demand effect as a special case, empirical findings provide a basis for reexamination of importance and/or robustness of the demand effect. As developed, the intertemporal framework enables inferences as to the extent to which arbitrage pricing factors, e.g. crude oil prices can be characterized to derive relevance for asset pricing from interactions with preferences of agents within stock markets