The Role of CAPM and Oil Prices to Analyze the Firm’s Stock Return

Abstract

This paper attempts to analyze the applicability of CAPM and the effect of oil prices on firm’s stock in case of Pakistan. To examine this research objective, we use the yearly data of 148 listed firms over the period of 2006 to 2015. We employ three different estimation techniques, panel correlated standard error estimation (PCSE), Driscoll and Kraay (DK) estimation and common correlated effects pooled (CCEP), to analyze the relationship between oil variables and firm’s stock return. Moreover, we further estimate the variables by using robust estimation techniques to validate the empirical results. The estimations report the inapplicable of market premium in case of Pakistani firms. However, the oil price and lagged oil prices provides the evidence of negative and statistically significance in textile, sugar, cement, chemical and engineering sectors. On contrary, the oil prices and lagged oil prices have positive and significant impact on stock return in transportation and energy sectors. In conclusion, it is difficult to escape the conclusion that oil price has higher influence on stock returns as compared to the market premium and nearly all the manufacturing sectors are inversely affected by the oil price rise.