5 Conclusion
There is a huge body of literature that investigates how the oil price affects stock returns. An apparent research gap, however, is present in this literature. Our approach is to concentrate on three specific issues. First, we examine the impact of oil prices on Pakistani firm returns; for this purpose we analyze the data of 397 listed firms over the period 1998–2014. The fixed effect method confirmed a significant positive relationship between oil prices and firm’s equity return. Second, the study investigates whether the effect of the oil price on firm’s equity return is the same for all industries; we confirm that it is not. The effect of the oil prices on firm-level equity returns is industry specific. We divide firms into 12 industries and unravel that, while for the most of the industries, a rise in the oil price generally increases firms’ equity return; tobacco, jute and vanaspati are the only industries that prove insignificant. Finally, we examine whether the oil price affects firm-level equity return with lag, and whether such an association is industry specific. The results find that lagged oil prices affect adversely in most of the industries, except tobacco, vanaspati and miscellaneous industries.
The significant positive relation indicates that oil price rise do not adversely affect the Pakistani industrial infrastructure and the stocks on aggregate level and industrial level absorb the oil price shocks. The result indicates that the change in oil price can be due to the demand-side pressure during the study period; the price increases because of oil demand by the Pakistani industries to enhance their operations which also provide positive signal in the stock market and investors increase the trading of such stocks.
