Macroeconomic risk factors in stock returns of companies operating in the oil and gas industry.

Abstract The trade-off between risk and return has always been one of the main issues in investment decision-making. This concern is of particular importance the volatile sector of oil and gas, as the world dependence on energy is continuously growing stimulating even higher demand for oil and gas in both developed and emerging economies. The factors affecting stock returns of oil and gas companies have been widely researched. This study provides further evidence of the effect of macroeconomic risk factors on stock returns of oil and gas companies. The results presented in this study suggests that oil price is the main determinant of oil and gas stock returns, and there is a strong positive relationship between the two. This holds even in the periods of an economic recession. The world market stock index return was also found to have a significant positive impact on stock returns. The evidence also suggests that stock returns are adversely related with exchange rates and interest rates, and positively related with inflation rates. Moreover, the study examined differences in risk factors in stock returns of US and non-US companies. While non-US companies respond positively to inflation changes and negatively to interest rate changes, US companies stocks are adversely related to inflation rates and positively related to interest rates. Furthermore, the findings suggest that inflation rates have a positive impact on stock returns in a crisis, and a negative impact in the period of stability, while the relationship between stock returns and oil prices holds in the period of crisis, but becomes weaker that in a period of stability. The results discussed in the study have implications for investment decision-making and risk management