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The Determinants of Stock Price Exposure in Mining and Extractive Industries: An Analysis of the Oil Industry

ABSTRACT
The purpose of this paper is to establish the validity of Tufanos (1998) stock price exposure model for gold mining firms to other industries which involve the extraction or mining of commodities. Firms that operate in such industries are likely to have similar operating and market risks. This suggests that market and production factors will be jointly important to all firms, not just the gold mining industry. As predicted by Tufano (1998), an application of the model to the global oil industry provides evidence of a negative role for crude oil prices, crude oil return volatility and long-term interest rates on the conditional variation of oil exposures for these firms. Our findings suggest that Tufanos (1998) model is equally applicable to all mining and extractive industries.

JEL Classification: G12, G15 Keywords: Conditional Betas, Commodity Exposures, Oil Exposures, Oil Industry.

The Determinants of Stock Price Exposure in Mining and Extractive Industries: An Analysis of the Oil Industry ABSTRACT
The purpose of this paper is to establish the validity of Tufanos (1998) stock price exposure model for gold mining firms to other industries which involve the extraction or mining of commodities. Firms that operate in such industries are likely to have similar operating and market risks. This suggests that market and production factors will be jointly important to all firms, not just the gold mining industry. As predicted by Tufano (1998), an application of the model to the global oil industry provides evidence of a negative role for crude oil prices, crude oil return volatility and long-term interest rates on the conditional variation of oil exposures for these firms. Our findings suggest that Tufanos (1998) model is equally applicable to all mining and extractive industries.

1. Introduction Corporate managers and investors care about the extra-market risk exposure of firms (Tufano, s 1998, p. 1015). While the specifics will depend on the nature of the core business, such risk exposures can be usefully dichotomized into financial price exposures (interest rates and exchange rates) and commodity price exposures. Managers and investors of banks and financial institutions care about interest rate exposures while managers and investors of multinational corporations care about exchange rate exposures. With regard to commodities, the two most prominent examples that have headlined the financial press early in the 21st Century are gold and oil. Managers and investors of gold mines care about gold price exposures, while the managers and investors of oil producers similarly care about oil price exposures. As such, analysts following these companies will/should also care. Considerable evidence exists supporting the role of an extra-market factor that can be directly linked to the central economic activity of firms within a particular industry. For example, in the gold mining sector it has been well documented that the change in gold price is an important determinant of the return on gold mining stocks. Initial work by McDonald and Solnik (1977) has been confirmed and reinforced by others including Blose and Shieh (1995) and Tufano (1998).1 The current paper augments the literature byproviding an extension of the work of Tufano (1998) beyond the case of gold betas in the gold mining industry that he investigated.

Similarly, in the banking and finance industry, Flannery and James (1984) and Elyasiani and Mansur (1998) have found a significant role for an interest rate factor over and above a market factor. Madura and Zarruk (1995) extend many pre-existing single country studies by providing comparative evidence on the interest rate risk of banks in Britain, Canada, Germany, Japan and the US. They concluded that non-US banks have a greater interest rate sensitivity. This evidence is also of note since it suggests that, at least in the context of this study, investigating data beyond the US can be insightful and rewarding. In the case of multinational corporations (somewhat mixed) evidence has been accumulated that companies are sensitive to a foreign exchange factor (Jorion, 1990; Bartov, Bodnar and Kaul, 1996; and He and Ng, 1998).

Specifically, Tufano (1998) examined a sample of 48 North American (US and Canadian) gold mining firms and developed a simple theoretical model in which predictions are made about the variation of conditional gold betas. In his paper the factors hypothesized to drive gold beta variation are related to: (a) market conditions namely, gold price; volatility of gold prices; and interest rates; (b) exogenous firm factors namely, quantity of production; reserves; and variable and fixed costs; (c) financial policy namely, financial leverage; and (d) risk management policy namely, percentage of output hedged and hedge price. Generally, Tufano finds good support for his model the most relevant aspect for the current study suggesting that conditional gold betas of mining firms are negatively related to gold price; the volatility of gold price returns; and interest rates. However, Tufanos model need not be exclusively linked gold betas of the gold mining to industry. Indeed, the basic elements of the underlying valuation model are common to all mining and extractive industries in general. Accordingly, our basic research question can be simply stated: does Tufanos model have more general applicability beyond gold mining companies? Given this question: which resource-based sector would be an interesting and insightful focus for our study? Oil seems an obvious and attractive choice. Ongoing supply (e.g. Middle-East conflicts and general political tensions) and demand (e.g. China) side considerations for oil have fuelled considerable price volatility over recent years. This has induced a growing worldwide media attention on oil and the broad impact it has on all economic activity. Moreover, a renewed academic interest in oil is illustrated by a very recent paper, Jin and Jorion (2006), who examine oil and gas betas of 119 US-based oil and gas producers, in the context of firm value and hedging. Hence, the major tests conducted in our study build on Tufanos (1998) basic

theoretical model and are applied to the case of oil exploration and production companies (hereafter, either E&P or oil producing companies).2 We choose to investigate the determinants of conditional oil company risk at the portfolio or aggregate level. By taking this aggregate focus we secure the important advantage of washing out firm-specific noise in the data. Accordingly, this provides more powerful tests of hypotheses in which oil-producing firms have common exposure characteristics i.e. to the category of market conditions described above.3 According to Tufanos (1998) model, the crude oil price, volatility of crude oil prices and long-term interest rates are all predicted to have a negative effect on the oil betas of oil producing companies. Notably, we provide strong evidence that the Tufano model works well in the oil industry. This evidence is not limited to just North America it is shown to be applicable on a global level. There are two main findings from our analysis. First, we show that estimated

unconditional oil betas of oil producing companies, while consistently positive in sign and highly statistically significant, are also surprisingly small in magnitude. We estimate that for a 1 % change in the price of crude oil, the value of oil producing companies typically changes (in the

A number of studies have focused on the potential role of an oil price factor not simply for oil producers but more generally as a potential candidate for a pervasive global asset pricing factor. This literature is well represented by Chen, Roll and Ross (1986), Hamao (1989), Kaneko and Lee (1995), Ferson and Harvey (1995) and Jones and Kaul (1996). The basic thrust of this literature is that the role of an oil factor in asset pricing is less than certain. On the one hand, Chen, Roll and Ross (1986) using US, and Hamao (1989) using Japanese data, could not support the role of an oil factor. However, Kaneko and Lee (1995) find support for a Japanese oil factor using a more recent time period. Further, in an international setting, Ferson and Harvey (1995) reject the hypothesis that an oil-price risk factor is equal across their sample of eighteen countries and similarly, Jones and Kaul (1996) find support for an oilbased factor. 3 The drawback of this approach is that it eliminates the role of firm specific variables and factors such as cost structure and financial policies and, hence, hypotheses related to these features cannot be tested. For example, the hedging activity dimension, highlighted in the Tufano model, cannot be explored in our work due to the aggregate nature of our analysis. However, ignoring hedging may not be such a big issue since in a very recent paper Jin and Jorion (2006) report that hedging does not seem to be related to the market value of oil and gas producer companies in the US. Interestingly, the explanation advanced for this result is that investors would find it relatively easy and cheap to engage private hedging actions since exposures of oil and gas producers are easy to identify and easy to hedge (Jin and Jorion, 2006, p. 915).

same direction) by around 0.2 %. These figures are generally applicable to listed oil companies worldwide. Our findings are in contrast with those of Tufano (1998) and others, which reveal a change roughly tenfold greater for the counterpart case of gold prices and gold mining companies. Our second and most central finding is that a strong and important role exists for the price of crude oil; the volatility of crude oil returns; and long-term interest rates as conditioning variables in the context of time-varying oil betas for oil producing companies. For example, according to the estimation results when using the West Texas intermediate crude oil price, for a one standard deviation higher oil price volatility, the measured oil beta of the global oil producing portfolio falls by around 0.325. Such a decline is economically meaningful. As an alternative example, we show that when all three factors are observed to be jointly above (below) their respective median values the measured global oil beta is 0.06 (0.21), compared to its base value of 0.16 (against the West Texas intermediate crude oil price). What then are the implications of our study? The first general implication is that careful application of the Tufano model to oil companies, whether practically or more research-based, is appropriate in terms of the market conditions type factors in his model. Moreover, our work suggests that such extension is valid beyond companies that are based in North America. It also suggests potentially fruitful research-based extensions of the model to other commodity-based industries beyond gold and oil. Second, there is a cautionary tale coming from our analysis managers and investors should not expect the same large impact of oil price on oil stocks, as found by Tufano and others for gold on gold stocks. For example, in terms of unconditional estimates, the oil price exposures appear to be almost an order of magnitude smaller. This suggests that the operating and financial leverage aspects of the two industries are considerably

different and also that investing in gold companies is much closer to a pure play than investing in oil companies. Thus, despite the general success of Tufanos model, a blind application of his gold price results to the oil sector would be a big mistake. Third, managers, investors and oil industry analysts should factor in the effects of oil price, oil price volatility and interest rates when assessing conditional oil price exposures. More specifically, these three factors can be assumed to have a negative impact on the oil price exposure of oil stocks and this has important implications for the valuation of such companies. The remainder of this paper is organized as follows. Section two outlines the research design, while results are presented in section three. Section four presents the conclusions. 2. Research Design

2.1 Unconditional Market and Oil Betas of Oil Industry Portfolios We employ a global market index in our analysis. A common market benchmark is desirable across all regions to facilitate comparability of estimated coefficients and also since the crude oil industry is highly integrated into the world financial markets, a global index is more applicable in the context of our international tests. Accordingly, the unconditional two-factor model used is given by:

R ot =

R wt +

COR t + e it

(1)

where Rot is the return on the international oil industry portfolio in period t; Rwt is the return for the world market portfolio in period t and CORt is the return on crude oil in period t. The

coefficient on the market factor is referred to as the market beta, while the coefficient on the crude oil factor is referred to as the oil beta.

2.2 Determinants of Oil Price Exposures Interactive Variables Approach Tufano (1998) provides the basic theoretical model upon which our main analysis is conducted. In his paper, the factors hypothesized to drive gold beta variation are: (a) gold price; (b) quantity of production; (c) reserves; (d) variable and fixed costs; (e) volatility of gold prices; (f) interest rates; (g) percentage of output hedged; (h) hedge price and (i) financial leverage. Given the aggregate (portfolio) form of our analysis, we model the subset of factors that capture the potential role of market conditions i.e. (a); (e) and (f) where in the current situation (a) and (e) relate to crude oil prices. Following Tufano (1998) we jointly estimate the market betas and oil betas and their determinants using an interactive variables specification. The structure is expressed as follows:

R ot =
it

it

R wt +

it

COR t + e it
it

(2) (3)
it

= c 0 + c 1 CO Pr ice t + c 2 CORVol t + c 3 IR t + = d 0 + d 1 CO Pr ice t + d 2 CORVol t + d 3 IR t +

it

(4)

where COPricet is the price of crude oil in period t; CORVolt is the return volatility of crude oil in period t; and IRt is the long-term interest rate in period t. The Tufano model predicts signs for these coefficients to be negative i.e. the oil beta of an oil industry portfolio is expected to decline when the crude oil price, crude oil return volatility or long-term interest rates rise. Substituting (3) and (4) into (2) we get:

R ot =

+ c 0 R wt + c1 [CO Pr ice t * R wt ] + c 2 [CORVol t * R wt ] + c 3 [IR t * R wt ]

+ d 0 COR t + d 1 [CO Pr ice t * COR t ] + d 2 [CORVol t * COR t ] + d 3 [IR t * COR t ] + e it

(5)

2.3

Determinants of Oil Price Exposures Dummy Variable Approach

Since the market conditions conditioning variables COPricet; CORVolt and IRt are all predicted to have the same negative impact on the commodity beta, we can construct two dummy variables designed to capture the extremes of these combined effects. Specifically, an up dummy variable (Du) would identify those periods in which all three variables are jointly higher than usual, while a down dummy variable (Dd) would identify those periods in which all three variables are jointly lower than usual. Accordingly, an alternative to the Tufano (1998) interactive model, is to estimate a dummy variable regression of the following form:

R ot =

0 0

R wt +

[D u * R wt ] +
u

[D d * R wt ] +
d

COR t +

[D u * COR t ] +

[D d * COR t ] + e it

(6)

where Du (Dd) is a dummy variable which takes a value of unity if the crude oil price, the crude oil return volatility and the long term interest rate (US 10-year Treasury Bill rate) are jointly above (below) their sample median values. Focusing on the oil beta, the coefficient
0,

represents the base case oil beta estimate i.e.

the average oil beta for that part of the sample period in which the conditioning variables COPricet; CORVolt and IRt are not all simultaneously either above or below their median values. The coefficient
u

( d) represents the increment to the base oil beta for that portion of the sample

in which the three potential determinants are simultaneously above (below) their median value.

Hence, (

u)

measures the average oil beta for the above median periods, while (

d)

measures the average oil beta for the below median periods. According to Tufanos model, there should be a negative relationship between oil price sensitivity and all three variables, so in terms of the dummy variable version of the model the appropriate null and alternative hypotheses become: H0:
u

versus H1:

<

2.4

Data

We follow Tufano (1998, p. 1018) and use daily data in our analysis.4 Specifically, we investigate the oil price exposures of oil exploration and production companies in five different international industry portfolios namely, Australasia; Europe; North America; South East Asia and an aggregate global oil industry portfolio, sourced from Datastream. We choose to analyse the oil exploration and production portfolios because they best match the inherent mining nature of the gold mining companies modeled and tested by Tufano. The production and exploration indexes offer the important advantage that they represent a cleaner capture of the underlying effects we are hoping to observe. If we were to include integrated oil companies or even broader oil industry portfolios, the power of our tests would be weakened by the fact that oil exploration/production, would be diluted by refining, marketing, chemicals, and other incidental activities undertaken by such firms.5 In other words, we seek to choose an

Daily data allows us to ensure that our results are comparable with Tufano (1998) as much as possible. However, there are a number of issues that arise as a result of our cross-country analysis, most notably the non-synchronicity of trading periods across different time zones. Our empirical methods (discussed later) are modified as a result. 5 Confining our analysis to Exploration and Production companies has the added advantage that several very large and dominant Integrated oil companies are excluded: eg. BP and Royal Dutch Shell. Such firms, were they party to the analysis, would likely swamp the effect of most other companies, thereby blurring the external validity of our experiment.

experimental design in which we maximize the a priori relevance of the variables/model to our sample.6 Each DataStream index consists of a sample of stocks covering a minimum 75-80% of total market capitalization of the target sector. As such, the indexes are highly representative of the Exploration and Production (E&P) oil sector. Moreover, as a result the world aggregate portfolio is highly representative of the global exploration and production activity in crude oil. Notably, inclusion of the world oil industry portfolio allows us to capture, in aggregate form, the complete global oil industry, as such providing coverage of the industry in nations outside the other four international portfolios analyzed. Accordingly, to facilitate interpretation and permit a coherent message to be given (supplemented by other reasons given shortly), the central part of our analysis focuses attention on this global oil portfolio. A summary of the key features underlying the DataStream E&P Indexes is presented in Table 1 (based on 30 September, 2005 data). From this table several interesting observations can be made. First, it is observed that DataStreams global E&P index comprises 127 oil companies, across 21 countries. The total market capitalization of the global sector as at 30 September, 2005 is $774 billion (US). Second, the North American index represents approximately half of the global index both in terms of $MCap and numbers of companies. Third, the next most prominent segment of the index involves European ownership, coming in at about one quarter. Fourth, from the remaining countries captured by the DataStream index, Hong Kong, India and Japan are the most notable in size. Finally, it is interesting that several countries are surprise listings given their lack of natural oil resources for example, Hong Kong, Singapore, Sweden and Ireland. This feature of global oil ownership (outside of the Middle East) suggests that it is

Our argument is analogous to the literature, for example, that investigates FX exposures and chooses to sample only those companies that have a multinational presence or have a direct international trading exposure.

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of only limited value to conduct regional or even more disaggregated analysis. As such, this further justifies our decision to primarily focus on the global oil industry results in our main analysis. [TABLE 1 ABOUT HERE]

In addition to obtaining matching daily data for the world market portfolio (constructed by Datastream) and US 10-year Treasury Bill rates; we utilize five alternative measures of crude oil price: (a) West Texas intermediate (WTI); (b) two-month forward prices on WTI (WTIf2); (c) London Brent Crude Oil Index (BRT); (d) two-month forward prices on BRT (BRTf2); and (e) six-month futures on crude light oil (F6m) from the New York Mercantile Exchange (NYMEX). This mix of crude oil prices gives a broad coverage of spot and futures/forward prices, allowing us to check for the robustness of any observed relationships. Moreover, it permits us to gain some appreciation for the impact of the term structure of forward/futures prices.7 All data (except F6m) are sourced from DataStream, cover the period from December 31, 1989 to September 2005 and are denominated in US dollars.8 In the case of F6m, the original data source is the Wall Street Journal and we obtained them from the Scotia Group Inc.9 In Table 2, we present the basic descriptive statistics for our dataset. [TABLE 2 ABOUT HERE]

In Panel A of Table 2, the descriptive statistics for the returns on international industry portfolios are reported. First, it can be seen that over our sample period the SE Asian portfolio
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Ideally, we would have preferred to employ longer maturity futures than the six-month case. However, we were concerned about the lack of liquidity in such longer-maturity contracts thereby raising questions about the reliability of such data. Our choice of six-months balances off the competing research design issues since the sixmonth contract affords an appreciation of the longer maturity, without unduly compromising liquidity. 8 Due to the constraints of data availability for the South-East Asian oil industry portfolio, the sample in this case begins on 14 November, 1990.

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experienced the maximum mean return annualized to about 16% p.a., while overall the world oil industry achieved an average return of approximately 8% p.a. Second, we observe that the maximum daily returns range from 19.0 % (S E Asian oil industry portfolio) to 4.3 % (world oil industry portfolio). Third, the minimum daily returns range from 21.3 % (SE Asian oil industry portfolio) to 5.7 % (world oil industry portfolio). Fourth, with the exception of the SE Asian oil industry, the standard deviation of daily returns is reasonably uniform across the portfolios, in the range 0.01 to 0.013. In the case of the SE Asian oil industry, the standard deviation of returns is approximately double the others. Accordingly, it appears that the SE Asian industry is more risky than its international counterparts. It can also be seen that typical of daily data, considerable excess kurtosis is evident. Panel B of Table 2 provides similar descriptive statistics for the crude oil price returns used in the study. Of greatest note are the large recorded negative returns (-40%) particularly for the spot versions of the Brent and West Texas prices.10 We investigated these negative extremes and found that in all cases they occurred on 17 January 1991: this signified the timing of the beginning of the first Gulf war, which induced dramatic crude oil price declines.11 Further it can be seen that the crude oil return has been considerably more volatile than all oil industry portfolios with the exception of the SE Asian oil industry. In Table 3 we present return correlations. In Panel A we see that the SE Asia oil industry is least related to any other oil industry its correlations range between 0.06 (with North

The web site address from which the data were obtained is: http://www.scotia-group.com/downloads/oil.asp. Note that our Brent forwards data only start in October 1993, and so, the minimum oil return in this case must occur on a different date. 11 Source: Energy Information Administration website, World Oil Market and Oil Price Chronologies: 1970 2004 http://www.eia.doe.gov/emeu/cabs/chron.html. Looney (2005) argues that over the period between Iraqs invasion of Kuwait and the US response in January 1991, a war premium had been impounded into crude oil prices, but that on 17 January 1991 with the outbreak of hostilities, this premium collapsed. Looneys interpretation is that this reflected markets confidence in the ultimate outcome of the first Gulf War.
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America) and 0.18 (with the world oil portfolio). The highest correlation reported in Panel A is 0.79 between the North American oil industry and the world oil industry. The correlation between Europe and the world oil industries is also quite high at 0.44. A final overall comment on these correlations is a feeling that they are lower than expected it seems that the common industrial factor driving returns is dominated by other factors beyond the oil industry. [TABLE 3 ABOUT HERE]

Panel B of Table 3 presents the correlations between the alternative crude oil returns. Of most note in this table are the high correlations (> 0.7) between all cases except those compared to F6m. Specifically, correlations involving F6m are no higher than 0.3 against WTIf2, and as low as 0.06 against BRTf2.

2.5

Di son -type adjustment allowing for Non-synchronicity Issue m

A final issue that needs to be addressed is that of non-synchronicity, given that daily data are used, since DataStream will record all data at the local closing price for the relevant time zone. Given the range of international markets we are using, a considerable degree of daily overlap will be in-built into the data. One potential criticism of our analysis based on daily measures is that they do not capture the non-synchronous closing price for markets on different continents. To address this problem, we construct a composite oil beta measure using Dimsons (1979) approach, whose original purpose was to provide an unbiased estimate of systematic risk for thinly traded securities. One of the biases caused by infrequent trading is that a particular days closing price may reflect a transaction from a previous period rather than the current day. Given that a similar

problem exists when daily data in different time zones is used, we introduce a control for non-

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synchronous trading, namely the Dimson (1979) measure with one lead and one lag. Specifically, the unconditional two-factor model (1) is estimated in the following regression:

Rot =

i,-1Rwt-1

i,0

Rwt +

i,1Rwt+1

i,-1CORt-1+

i,0CORt

i,1CORt+1

+ eit

(7)

The sum of the coefficients on the market return terms, denoted as i:


i

i, 1

i ,0

i ,1

(8)

is referred to as the (adjusted) market beta, while the sum of the counterpart coefficients on the crude oil factor, denoted i:
i

i, 1

i ,0

i ,1

(9)

is referred to as the (adjusted) oil beta. Since it is the sum of the coefficients which is of interest, the regression equation is re-parameterized so that the coefficients and t-statistics of and
i i

are obtained directly. Specifically, we substitute out for (a)


i,0

i,0

i,-1

i,1,

(derived

from a slight re-arrangement of (8)) and (b)

i,-1

i,1,

(similarly derived from a slight

re-arrangement of (9)) in equation (7) to produce the following regression:

Rot =

i,-1Rwt-1

+ ( i

i,-1 i,1)Rwt

i,1Rwt+1

i,-1CORt-1+

( i

i,-1 i,1)CORt

i,1CORt+1

+ eit (10)

This specification allows us to directly estimate

and test its significance using OLS. The

approach is similar to the Wald test applied to test the significance of the sum of coefficients in equation (7) and produces the same p-value.

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3. Tests of Conditional Oil Beta Determinants 3.1 Static Oil Betas

In this sub-section we report the outcome of estimating the static unconditional risk model of Equation (1), which controls for global equity market movements. The outcome of estimating this regression for the Australasian; European; North American; South East Asian and global oil industry portfolios is presented in Table 4.12 Panels A, B and C report results for the cases where crude oil returns are: WTI, WTIf2 and F6m, respectively.13 [TABLE 4 ABOUT HERE]

In summary, the table reveals three main results. First, it can be seen that world market beta risk of oil companies is low to moderate depending on which portfolio is considered. For example, in terms of the WTI results in Panel A, the market betas range from 0.53 in the case of the Australasian oil industry, to 0.74 for the world oil portfolio. Second, regardless of the crude oil proxy employed, the estimation results are quite consistent across the three panels. Third, we see that the oil betas are all positive, significantly different from zero (with the exception of the SE Asia portfolio) and significantly less than unity. Indeed, we observe quite small estimated oil betas. For example, the world oil industry has an oil beta lying in the range 0.145 (WTI) to 0.270 (F6m). Notably, the maximum oil beta observed in Table 4 is 0.371 for the North American index, against F6m.

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All regressions estimated in the paper use Newey-West heteroskedasticity and autocorrelation consistent standard errors. 13 Dimson-type adjusted estimates (for this and all other regressions) reported in this study utilize one lead and one lag of the relevant return variable. We also experimented with two leads and lags but the basic thrust of our results is unchanged. We suppress the results for purely contemporaneous estimates and for BRT and BRTf2, to conserve space. They are available upon request.

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These figures greatly contrast similar analysis on the gold industry, as reported in the literature. For example, Tufano (1998) reports gold betas of North American gold firms of around 2. It would seem that oil companies are subject to substantial non-industry related influences that serve to reduce the oil price exposure. This is also reflected in the relatively low adjusted R2 values from these regressions. For example, in the case of the WTI regressions the SE Asian oil industry has an adjusted R2 of 0.039, while the Australasian industry produces an adjusted R2 value of 0.100. The substantially smaller commodity beta of oil companies versus gold companies may also be an indication that operating and financial leverage characteristics are somewhat different between the two industries.

3.2

Determinants of Conditional Oil Betas Interactive Variables Estimation Results

The model developed by Tufano (1998) provides a role for three factors that relate to general market conditions, as potential determinants of conditional gold betas. As argued earlier, in theory, counterparts to these three factors are equally applicable to all extractive and mining companies. Initially, we address this issue by applying the joint (interactive) estimation approach outlined earlier and represented by equation (5). In that model, conditional oil betas are modeled by interactive variables involving (a) crude oil price; (b) crude oil return volatility;14 and (c) long-term interest rates. Furthermore, the model predicts a negative relationship in all cases i.e. the conditional oil beta is expected to decline for increases in any of these variables. The results for this regression applied to the world oil industry portfolio are reported in Table 5,

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The volatility series was obtained by running a GARCH (1,1) model on the crude oil return series. The estimated model passes the normal diagnostic tests and the results are available from the authors upon request. Clearly, there are other ways to measure volatility, such as an implied volatility series imputed from crude oil options data. Unfortunately, data availability has precluded the use of this measure in the present analysis, but given the success of the GARCH(1,1) model in capturing time series variation in crude oil return volatility, we are content that our tests are suitably robust.

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wherein we show various parsimonious versions of the model, thereby allowing greater insights into the relationships uncovered.15 [TABLE 5 ABOUT HERE] Panel A of Table 5 shows the outcome for the WTI version of the model. First, with regard to the role of the crude oil price conditioning variable, our regressions fail to reveal the hypothesized negative relationship indeed; this variable is coming through with a significant positive coefficient.16 Second, with respect to the crude oil return volatility as a conditioning variable, significant and negative cases are found in all estimations (as expected). For example, according to the full model estimation results when using the West Texas intermediate crude oil price, for a one standard deviation higher oil price volatility, the measured oil beta of the global oil producing portfolio falls by around 0.325. From an economic significance point of view, this represents a considerable change relative to the unconditional oil beta estimate (0.145) reported in Table 4, Panel A. Third, when the long-term interest rate is used as a conditioning variable, in accordance with our model predictions a significant and negative role is observed. For example, for a one standard deviation higher long-term interest rate, the measured oil beta of the global oil producing portfolio falls by around 0.03. Interestingly, in terms of economic importance, this decline is swamped by its counterpart relating to oil price volatility (indeed, there is an order of magnitude differential: 0.325 versus 0.03).

Part of the motivation for exploring variations of the model, is a potential multicollinearity issue. The results reported here and later allay any fears that multicollinearity has impeded our ability to uncover distinct roles for the variables examined. We suppress the results for BRT, BRTf2 and F6m, to conserve space. They are available upon request. 16 Interestingly, in an earlier version of this paper we used a dataset that terminated at the end of 1999 and with that shorter period we observed the predicted negative sign for the interaction term involving the crude oil price. This change in sign possibly reflects that with an increase in oil prices, there may be an increase (decrease) in value of the real entry (exit) options. In such circumstances, the sign of coefficients may be time and state varying. We thank an anonymous referee for suggesting this interpretation. Full exploration of this issue is beyond the scope of the current paper it deserves a separate treatment, which we leave for future research.

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The results reported in Panel B, relating to WTIf2 strongly confirm the findings in Panel A. In summary, based on the WTI/WTIf2 analysis of Table 5, broad confirmation of the predictions and results from Tufano (1998) are found for the oil betas of the global oil industry portfolio. The role of the crude oil return volatility and long-term interest rate as conditioning variables are particularly strong.

3.3

Determinants of Conditional Oil Betas Dummy Variable Regression Results

As a robustness check to the preceding analysis, we estimate the dummy variable regressionbased model, as presented in Equation (6). Rather than allowing for a full conditional oil beta specification (such as provided by the interactive model of the previous section) we greatly simplify the changing oil beta into mean level estimates across a trivariate regime partition of the full sample period. In the up market (u) case, market conditions (simultaneously) reveal above median values of the crude oil price; the crude oil return volatility and long-term interest rates.17 Conversely, in the down market (d) case, market conditions (simultaneously) reveal below median values of crude oil price; crude oil return volatility and long-term interest rates. All remaining periods (i.e. those that are neither classified as u or d) are effectively grouped into the third regime which captures periods in which one of the market condition variables (relative to its sample median) moves in the opposite direction to the other two. In the context of Equation (6) this third (middle) regime constitutes the benchmark or base case. From our total sample of 4,109 observations, between 219 and 523 (240 and 393) days classify in the up (down) regime, depending on which crude oil price proxy is used representing approximately 5.3% to 11.5% (5.8% to 9.6%) of the time series analysed.

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The median is with reference to the full sample period chosen. It is assumed that the sample period is sufficiently representative of the usual distributions for each of the market circumstance variables investigated.

18

Table 6 presents the outcome of estimating the dummy variable regression model of Equation (6) for the aggregate world oil industry portfolio and the main features are as follows. First, comparing it back to the outcome of the basic model reported in Table 4, the estimated base case oil betas are very similar to, but uniformly higher, than the corresponding overall period unconditional betas. They are all positive and statistically significant. For example, the base case oil beta against WTIf2 is 0.2055 (t-statistic of 18.86) compared to its unconditional counterpart from Table 4 of 0.1869 (t-statistic of 19.65). Second, it can be seen that in all but one case (BRTf2) the up oil beta is statistically different from (and less than) the base case.18 For example, the up regime oil beta against WTI is estimated to be 0.0623 (i.e. 0.1016 lower than the base case of 0.1639), which is consistent with the prediction coming out of Tufanos model, (with a t-statistic of 5.34 for the difference, relative to base). Hence, for a 1 % change in crude oil prices during the up market regime, the equity price on world oil stocks experience on average a 0.06 % change (in the same direction). [TABLE 6 ABOUT HERE]

Third, in not one case is the down regime oil beta statistically higher than the base case. For example, against the WTI the base case oil beta is 0.1639 compared to its down regime counterpart of 0.2108 [0.1639 + 0.0469]. That is, for a 1 % change in crude oil prices during the down market regime, the equity price on world oil stocks experience on average a 0.21 % change (in the same direction). Finally, as an ultimate test of the negative relationship between oil beta and these market condition factors (crude oil price, volatility and interest rates), we report the test of the hypothesis of equality between the up and down market oil betas. From

18

Notably, even for the BRTf2 case, the finding is observed at the 10% level (two-tailed test).

19

Table 6, we see rejection of the hypothesis occurs (and in the correct direction) for all cases except BRTf2 thus providing extremely strong support for the Tufano model. In summary, this extended analysis greatly enhances our confidence in the applicability of the Tufano model to oil company portfolios.19 If anything, only the BRTf2-based results do not readily conform to the model.20

4. Conclusion

In this article we examine the validity of Tufanos (1998) model of stock price exposures of North American gold mining firms applied to other extractive and mining industries. Applying our analysis to the Oil (Exploration and Production) industry, we provide evidence that the conditioning variables affecting oil firms stock price exposures are as predicted by Tufano (1998). Specifically, and most strongly, our results suggest that crude oil return volatility and long-term interest rates have a negative impact on the oil betas of oil producing companies. The applicability of Tufanos (1998) model to other extractive industries is intuitively obvious. All mining firms face common risk within their respective industries. For example, whereas the value of gold mining firms will be strongly related to the price of gold, likewise the value of oil producing firms will have a high correlation with the crude oil price. In addition, the management of exposures to these risks are also likely to be consistent through all industries.
Given the various approaches that have been employed to determine the conditional and unconditional oil betas, it is important to ensure that the estimates are comparable across models (Tables 4, 5, and 6). A logical point of comparison in the conditional analysis of Table 5 is to evaluate the conditional oil betas when each of the imbedded variables (COPrice, CORVol, and IR) take their respective sample mean values. For example, for the WTI results in Panel A taking these values in product with the associated estimated coefficients and then summing them according to equation (4), provides a range of oil betas over the seven equations varying between 0.1448 and 0.1648. This range of values is very similar to the counterpart unconditional beta of 0.1454, reported in Table 4. Similarly in Table 6, the oil beta is 0.1639 in normal market conditions, 0.0623 (0.1639-0.1016) in up market conditions, and 0.2108 (0.1639+0.469) in down market conditions. For the WTI oil price proxy, there were 523 days in the Du state and 341 days in the Dd state out of grand total 4019 days. Therefore, the weighted average conditional oil beta from Table 6 is 0.1549 again quite similar to the Table 4 unconditional estimate of 0.1454.
19

20

Our findings indicate that the same set of factors influence the markets view of the exposure of mining firms to commodity risk. Moreover, this same set of factors seem to be generally applicable to all extractive firms operating in the international marketplace. Our study invites credible speculation that numerous other fruitful applications of the Tufano (1998) model may exist beyond the narrow case that he investigated, namely, gold firms. While we have explored oil, the obvious extensions are to other mining and extractive industries. It may also be worthwhile exploring even more general settings as well. Such investigation we commend to future research endeavors.

20

Recall that the available data for BRTf2 is considerably less than that for the counterpart crude oil price proxies. This shorter sample is likely to be a contributing factor in explaining the weaker findings for BRTf2.

21

References
Bartov, E., Bodnar, G.M., Kaul, A., (1996), Exchange Rate Variability and the riskiness of U.S. Multinational Firms, Journal Of Financial Economics, Vol. 42, pp. 105-132. Blose, L. and Shieh, J. (1995), The Impact of Gold Price on the Value of Gold Mining Stock, Review of Financial Economics, Vol. 4, pp. 125-139. Chen, N.F., Roll, R. and Ross, S.A., (1986), Economic Forces and the Stock Market, Journal of Business Vol. 59, pp. 383-403. , Elyasiani, E., and Mansur, I., (1998), Sensitivity of the Bank Stock Returns Distribution to Changes in the Level and Volatility of Interest Rate: A GARCH-M Model, Journal of Banking and Finance, Vol. 22, pp. 535-563. Ferson, W. and Harvey, C.R., (1995), Predictability and Time-Varying Risk in World Equity Markets, in Chen, A. (ed.), Research in Finance, Vol. 13, pp. 25-88. Flannery, M., and James, C., (1984), The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions, Journal of Finance, Vol. 39, pp. 1141-1153. Hamao, Y., (1989), An Empirical Examination of the Arbitrage Pricing Theory: Using Japanese Data, Japan and the World Economy, Vol. 1, pp. 45-61. He, J. and Ng L., (1998), The Foreign Exchange Exposure of Japanese Multinational Corporations, Journal of Finance, Vol. 53, pp. 733-753. Jin, Y. and Jorion, P., (2006), Firm Value and Hedging: Evidence from U.S. Oil and Gas Producers, Journal of Finance, Vol. 61, pp. 893-919. Jones, C. and Kaul, G., (1996), Oil and the Stock Markets, Journal of Finance, Vol. 51, pp. 463-491. Jorion, P., (1990), The Exchange Rate Exposure of Multinationals, Journal of Business, Vol. 63, pp. 331-342. Kaneko, T. and Lee, B.S. (1995), Relative Importance of Economic Factors in the U.S. and Japanese Stock Markets, Journal of the Japanese and International Economies, Vol. 9, pp. 290-307. Looney, R., (2005), Oil Prices and the Iraq War: Market Interpretations of Military Developments, Center for Contemporary Conflict, accessed from the website: http://www.ccc.nps.navy.mil/rsepResources/si/apr03/middleEast.asp, on 14 November, 2005. McDonald, J.G. and Solnik, B.H., (1977), Valuation and Strategy for Gold Stocks, Journal of Portfolio Management, Vol. 4, pp. 29-33. Madura, J. and Zarruk, E. R., (1995), Bank exposure to interest rate risk: a global perspective, Journal of Financial Research, Vol. 18, pp. 1-13. Tufano, P. (1998), The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry, Journal of Finance, Vol. 53, pp. 1015-1052.

22

Table 1: Summary Information on Constituents of the DataStream Oil Exploration and Production Indexes
This table reports summary information for constituent stocks as at 30 September 2005. N refers to the number of stocks contained in the relevant index; Total $MCap refers to the total market capitalization of the relevant index, measured in US dollars ($million); Larget $MCap, Median $MCap and Smallest $MCap refers to the largest, median and smallest (respectively) market capitalization company within the relevant index, measured in US dollars ($million). Largest Company Median Company N Total $MCap $MCap $MCap Panel A: DataStream Australasian Oil Exploration and Production Index Australia 5 32,857.05 18,289.2 4,408.12 New Zealand 1 144.96 144.96 144.96 Total Index 6 33,002.01 18,289.2 Panel B: DataStream European Oil Exploration and Production Index Austria 1 536.98 536.98 Czech Rep. 1 31.43 31.43 France 2 6,812.81 3,874.51 Ireland 3 1,933.75 1,735.96 Norway 4 4,533.58 1,779.56 Russia 13 166,571.1 124,451.3 Sweden 1 3,239.62 3,239.62 UK 10 18,000.03 5,531.42 Total Index 35 201,659.3 124,451.3 3,853.63 536.98 31.43 3406.4 146.58 1,095.09 1,793.59 3,239.62 1,169.36 1,243.2 Smallest Company $MCap 1,218.27 144.96 144.96 536.98 31.43 2,938.3 51.21 563.84 844.71 3,239.62 571.74 31.43 674.49 2,065.96 674.49 728.08 445.61 7,465.66 445.61 23.57 299.32 953.19 3,289.12 848.62 40.27 3.26 3.26 3.26

Panel C: DataStream North American Oil Exploration and Production Index Canada 37 123,510.3 24,138.78 1,735.41 US 29 280,399.3 34,342.76 3,519.54 Total Index 66 403,909.6 34,342.76 2,478.86 Panel D: DataStream South-East Asian Oil Exploration and Production Index Indonesia 2 1,901.06 1,172.98 950.53 Singapore 1 445.61 445.61 445.61 Thailand 1 7,465.66 7,465.66 7,465.66 Total Index 4 9,812.33 7,465.66 950.53 Panel E: Rest of World Oil Exploration and Production Companies Argentina 1 23.57 23.57 Hong Kong 3 31,006.37 29,676.34 India 3 47,393.19 34,430.69 Japan 4 37,894.28 14,835.94 Pakistan 2 9,072.44 8,223.83 Sri Lanka 1 40.27 40.27 Venezuela 2 85.15 81.89 All 16 125,515.3 34,430.69 Grand Total $MCap (million) 127 773,898.5 124,451.3 23.57 1,030.7 12,009.3 9,884.61 4,536.22 40.27 42.57 2,159.91 2,065.96

23

Table 2: Basic Descriptive Statistics Daily Data 1990 to September 2005


Panel A: Oil Industry Portfolio Daily Returns Australasia Europe North America SE Asia World Oil Ind Mean 0.000469 0.000440 0.000349 0.000629 0.000325 Std Dev 0.013452 0.013129 0.012106 0.022736 0.009589 Skewness -0.085019 -0.095274 -0.083625 0.286513 -0.301060 Kurtosis 4.614892 6.801318 4.932721 11.581714 5.108426 Maximum 0.068956 0.086912 0.052725 0.189503 0.043103 Minimum -0.083270 -0.087178 -0.068274 -0.212901 -0.057343 Panel B: Crude Oil Daily Returns^ BRT WTI BRTf2^^ WTIf2 F6m Mean 0.000262 0.000285 0.000418 0.000269 0.000179 Std Dev 0.024039 0.025426 0.019373 0.021402 0.016767 Skewness -1.60846 -1.32265 -0.26351 -1.62824 -1.0413 Kurtosis 33.02496 25.71897 5.760556 33.67981 16.68842 Maximum 0.131401 0.200828 0.109652 0.126121 0.092614 Minimum -0.43875 -0.40204 -0.13087 -0.39413 -0.23428 Notes: ^ BRT - Brent crude oil; WTI - West Texas Intermediate crude oil; BRTf2 - BRT 2-month forwards; WTIf2 - WTI 2-month forwards; F6m - 6-month futures on crude oil traded on the New York Mercantile Exchange. ^^ Due to data availability, our series for BRTf2 only begins at 21 October, 1993.

24

Table 3: Correlations Daily Data 1990 to September 2005


Panel A: Oil Industry Portfolio Returns Australasia Europe Australasia Europe North America S-E Asia World OI 1.000 0.239 0.170 0.164 0.306 1.000 0.208 0.103 0.438

North America 1.000 0.058 0.793

S-E Asia 1.000 0.175

World Oil Ind 1.000

Panel B: Crude Oil Daily Returns^ BRT BRT WTI BRTf2 WTIf2 F6m 1.000 0.734 0.935 0.881 0.292 WTI 1.000 0.748 0.794 0.284 BRTf2^^ 1.000 0.879 0.060 WTIf2 1.000 0.300 F6m 1.000

Notes: ^ BRT - Brent crude oil; WTI - West Texas Intermediate crude oil; BRTf2 - BRT 2-month forwards; WTIf2 WTI 2-month forwards; F6m - 6-month futures on crude oil traded on the New York Mercantile Exchange. ^^ Due to data availability, our series for BRTf2 only begins at 21 October, 1993.

25

Table 4: Unconditional Market and Oil Betas of International Oil Industry Portfolios
This table reports the estimation of the following model: Rot = i + i,-1Rwt-1 + ( i i,-1 i,1)Rwt + i,1Rwt+1 + i,-1CORt-1+ ( i i,-1 i,1)CORt + i,1CORt+1 + eit (10) where Rot is the return on the international oil industry portfolio in period t; Rwt is the return for the world market portfolio in period t and CORt is the return on crude oil in period t. The table reports Dimson-type adjusted estimates of the market beta and oil beta whereby each beta is obtained by summing the coefficient estimates on the contemporaneous, one lead and one lag of the market and oil price returns, respectively. Lead and lag estimates are not reported. Estimation is performed over the period January 1990 to September 2005. Panel A: West Texas Intermediate (WTI) Results 0.0003 0.5275 (1.57) * (13.20)* 0.5597 ac Europe 0.0003 (14.38) (1.55) 0.5806 ac North America 0.0002 (17.47) (1.22) 0.7087 ac SE Asia 0.0004 (9.59) (1.21) 0.7440 ac World Oil Industry 0.0002 (31.82) (1.29) Panel B: WTI 2-month Forwards (WTIf2) Results 0.0003 0.5398 (1.50) (13.61) 0.5688 ac Europe 0.0003 (14.69) (1.49) 0.5969 ac North America 0.0002 (18.10) (1.10) 0.7107 ac SE Asia 0.0004 (9.64) (1.20) 0.7544 ac World Oil Industry 0.0001 (32.47) (1.21) Panel C: Six-month Futures on crude light oil (F6m) Results Australasia Europe North America SE Asia World Oil Industry 0.0003 (1.25) 0.0003 (1.26) 0.0002 (1.00) 0.0003 (0.72) 0.0001 (1.13) 0.5177 (11.65) 0.5631 ac (13.16) 0.5800 ac (15.81) 0.6902 ac (8.38) 0.7588 ac (29.49)
ac

Australasia

ac

0.1500 (10.74)* 0.1104 ac (8.12) 0.2084 ac (17.95) 0.0269 c (1.03) 0.1454 ac (17.80)
ac

ac

DW 1.985 1.868 1.840 2.038 1.684

Adj. R2 0.100 0.106 0.230 0.039 0.394 Adj. R2 0.115 0.115 0.242 0.040 0.401 Adj. R2 0.098 0.117 0.228 0.035 0.409

Australasia

ac

0.1873 (11.54) 0.1392 ac (8.78) 0.2721 ac (20.16) 0.0374 c (1.22) 0.1869 ac (19.65)
ac

DW 1.988 1.874 1.874 2.038 1.714

0.2651 (11.03) 0.2363 ac (10.22) 0.3712 ac (18.72) 0.0716 c (1.58) 0.2702 ac (19.43)

DW 1.993 1.864 1.885 2.057 1.717

Notes: * In parentheses below each coefficient estimate is the associated t-statistic. a Denotes coefficient is statistically different from zero (and positive) at the 5 % level of significance. b Denotes coefficient is statistically different from zero (and negative) at the 5 % level of significance. c Denotes coefficient is statistically different from (less than) unity at the 5 % level of significance. d Denotes coefficient is statistically different from (greater than) unity at the 5 % level of significance.

26

Table 5: Determinants of Conditional Oil Betas of the World Oil Industry Portfolio Interactive Variables Approach
This table reports the estimation of the following model:

R ot =

+ c 0 R wt + c1 [CO Pr ice t * R wt ] + c 2 [CORVol t * R wt ] + c 3 [IR t * R wt ]

+ d 0 COR t + d 1 [CO Pr ice t * COR t ] + d 2 [CORVol t * COR t ] + d 3 [IR t * COR t ] + e it

(5)

where Rot is the return on the world oil industry portfolio in period t; Rwt is the return for the world market portfolio in period t; CORt is the return on crude oil in period t; COPricet is the price of crude oil in period t; CORVolt is the return volatility of crude oil in period t; and IRt is the long term interest rate in period t. The table reports Dimson-type adjusted estimates of the model in which the same functional form is assumed on the coefficients on the lead, contemporaneous and lag variables. Estimation is performed over the period January 1990 to September 2005. Panel A: West Texas Intermediate (WTI) Results (1) (2) (3) (4) (5) (6) (7) Estimate d0 0.1761a 0.3363a 0.1094a 0.2705a 0.3262a 0.2583a 0.0723a t-stat (3.11) (17.64) (9.86) (4.51) (5.90) (9.16) (5.44) Estimate d1 0.0029a . . 0.0026a 0.0021a . 0.0021a t-stat (3.38) . . (3.03) (2.41) . (2.34) b b b Estimate d2 . -19.6366 . -13.0204 -12.9748b . -21.0671 t-stat . (-4.89) . (-4.57) . (-2.80) (-2.80) Estimate d3 . -0.0277b -0.0257b -0.0230b . . -0.0297b t-stat . . (-5.55) . (-5.00) (-4.32) (-3.74) Durbin Watson 1.6753 1.6905 1.6823 1.6814 1.6784 1.6851 1.6809 Adj. R2 0.4012 0.3994 0.4147 0.4066 0.4185 0.4167 0.4201 Panel B: WTI 2-month Forwards (WTIf2) Results (1) (2) (3) (4) (5) (6) (7) Estimate d0 0.2193a 0.4102a 0.1321a 0.3326a 0.4091a 0.3279a 0.0956a t-stat (3.52) (17.97) (10.72) (4.64) (6.30) (10.41) (6.07) a a a Estimate d1 . . 0.0033 0.0024 . 0.0024a 0.0036 t-stat (3.61) . . (3.33) (2.30) . (2.29) b b b Estimate d2 . -29.718 . -20.833 -19.737 . -34.565 t-stat . (-3.51) . (-3.02) . (-2.02) (-1.90) Estimate d3 . -0.0314b -0.0319b -0.0285b . . -0.0342b t-stat . . (-5.69) . (-5.02) (-4.87) (-4.17) Durbin Watson 1.7086 1.7212 1.7232 1.715 1.7204 1.7242 1.7209 Adj. R2 0.4073 0.4048 0.4224 0.4108 0.4251 0.4231 0.4256 Notes: * In parentheses below each coefficient estimate is the associated t-statistic. a Denotes coefficient is statistically different from zero (and positive) at the 5 % level of significance. b Denotes coefficient is statistically different from zero (and negative) at the 5 % level of significance.

27

Table 6: Determinants of Conditional Oil Betas of the World Oil Industry Portfolio Dummy Variable Regression Results
This table reports the estimation of the following model:

R ot =

0 0

R wt +

[D u * R wt ] +
u

[D d * R wt ] +
d

COR t +

[D u * COR t ] +

[D d * COR t ] + e it

. . . (6)

where Rot is the return on the world oil industry portfolio in period t; Rwt is the return for the world market portfolio in period t; CORt is the return on crude oil in period t; Du (Dd) is a dummy variable which takes a value of unity if the crude oil price is above (below) its sample median value and the crude oil return volatility is above (below) its sample median value and the long term interest rate (US 10-year Treasury Bill) is above (below) its sample median value. The table reports Dimson-type adjusted estimates of the market betas and oil betas whereby each beta is obtained by summing the coefficient estimates on the contemporaneous, one lead and one lag of the market and crude oil price returns. Estimation is performed over the period January 1990 to September 2005. H0: u = d H0: u = d = 0 DW Adj. R2 0 u d a b c c WTI^ 0.1639 -0.1016 0.0469 13.6637 32.1149 1.6893 0.4032 (17.18)* (-5.34)* (1.24)* (0.00)# (0.00)# WTIf2 0.2055a -0.1176b 0.0494 10.8999c 27.1201c 1.7179 0.4096 (18.86) (-4.97) (1.05) (0.00) (0.00) -0.1203b 0.0385 12.6575c 38.2858c 1.7049 0.4009 BRT 0.1785a (18.33) (-5.99) (0.91) (0.00) (0.00) BRTf2^^ 0.2459a -0.0862 0.0088 1.6806 2.9624 1.7026 0.3736 (17.97) (-1.70) (0.16) (0.19) (0.23) -0.1715b 0.0290 8.1422c 23.5158c 1.7245 0.4170 F6m 0.2945a (18.50) (-4.75) (0.45) (0.00) (0.00) Notes: * In parentheses below each coefficient estimate is the associated t-statistic. # In parentheses below each test statistic is the associated p-value. a Denotes coefficient is statistically different from zero (and positive) at the 5 % level of significance. b Denotes coefficient is statistically different from zero (and negative) at the 5 % level of significance. c Denotes statistic is statistically significant at the 5 % level. ^ WTI - West Texas Intermediate crude oil; WTIf2 - WTI 2-month forwards; BRT - Brent crude oil; BRTf2 - BRT 2-month forwards; F6m - 6-month futures on crude oil traded on the New York Mercantile Exchange. ^^ Due to data availability, our series for BRTf2 only begins at 21 October, 1993.

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