Oil price risk exposure and the cross-section of stock returns: The case of net exporting countries

The main goal of this paper is to examine whether oil price risk is systematically priced in the cross-section of stock returns in net oil-exporting countries even after controlling for market and firm-level risk factors. Using firm-level data from the Gulf Arab stock markets, we find that stocks that are more sensitive to oil price changes indeed yield significantly higher returns, suggesting that oil price exposure can serve as a return predictor in these stock markets. However, we also find that it is the absolute exposure of a stock that drives returns, suggesting fluctuations in the oil price as a source of stock return premia in these markets. Our tests further suggest that a portfolio strategy based on a stock's absolute exposure to oil price risk yields significant positive subsequent returns as well, suggesting an investment strategy based on the absolute oil price risk exposure of stocks in net exporting nations. (c) 2015 Elsevier B.V. All rights reserved.