The strategy involves estimating oil earnings beta for each stock, calculating oil earnings surprises, and forming quintile portfolios. The top quintile is long, the bottom quintile is short, and portfolios are value-weighted.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Quarterly | MARKET: equities | KEYWORD: Oil
I. STRATEGY IN A NUTSHELL
The strategy targets stocks in the CRSP/COMPUSTAT database, estimating each stock’s oil earnings beta using 12-quarter rolling regressions. Oil earnings surprises are computed by multiplying the beta with the latest quarterly oil price change. Stocks are sorted into quintiles, going long on the top quintile and short on the bottom, with value-weighted portfolios held for one quarter.
II. ECONOMIC RATIONALE
Limited investor attention delays the incorporation of oil price changes into stock prices. By exploiting oil earnings surprises, the strategy captures predictable return patterns, independent of other anomalies, with low turnover and robust profitability despite transaction costs.
III. SOURCE PAPER
Oil Price Exposure, Earnings Announcements, and Stock Return Predictability [Click to Open PDF]
Jordan Moore, Rowan University – Accounting & Finance; Mihail Velikov, Pennsylvania State University – Smeal College of Business, Pennsylvania State University
<Abstract>
We provide evidence that equity investors with limited attention are slow to incorporate
information about how current oil price changes affect future earnings announcements.
Stock prices respond to lagged quarterly oil price changes when firms start announcing
earnings in the next quarter. A cross-sectional equity trading strategy that exploits this
inefficiency yields an annualized Sharpe Ratio of 0.50. Our oil-response forecast strategy
earns especially high returns after large absolute oil price changes and during the peak of
the earnings cycle. The return predictability we document is not explained by risk factor
exposure and survives a battery of robustness tests.
IV. BACKTEST PERFORMANCE
| Annualised Return | 6.29% |
| Volatility | 10.66% |
| Beta | N/A |
| Sharpe Ratio | 0.59 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
