Oil price shocks and coal industry returns: international evidence

Ronald A. Ratti
Mohammad Zahidul Hasan, University of Notre Dame Australia

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The Author:

Mr Zahid Hasan


This paper examines the effect of oil shocks on coal sector stock returns. Oil price increases have a statistically significant positive effect on coal sector returns that is larger than the effect of coal price increases on coal sector returns. Controlling for coal price, a 1% increase in oil price raises coal sector returns by about 0.27%, and controlling for oil price, a 1% increase in coal price raises the coal sector returns by about 0.12%. Relatively large increases in oil price returns have a statistically significant and disproportionate effect on raising coal sector returns. Oil price is as great a risk factor for the coal sector as for the oil and gas sector. Market return, interest rate premium, and foreign exchange rate risk are also significant risk factors for excess coal sector stock returns. The sensitivity of coal sector returns to oil price shocks suggest a role for investment in stocks that rise when energy prices increase in a well balanced portfolio and in pursuing profitable investment strategies. Oil prices appear to influence returns in the coal sector because they provide information for coal returns beyond that contained in coal price.