Oil Surprise Factor in Equities
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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.
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.
Backtest performance
Annualised return6.29%
Volatility10.66%
Sharpe ratio0.59