Abstract
In this study we propose a method of selecting the macroeconomic variables for forecasting the excess return signs of the U.S. oil and gas industry stock index by combining the Forward Sequential Variable Selection Algorithm and information criteria. We select predictors from a large monthly macroeconomic variable dataset designed by McCracken and Ng (2015). The method can adapt to the updated macroeconomic information and the possible time-varying relationship between the macroeconomic variables and the stock return signs. We also propose a method which can change the threshold value of the probit model automatically for considering the potential time-varying risk aversion level of the market participants. Further, we investigate the investment performance of an active trading strategy based on our forecasting model and compare it with a passive buy-and-hold trading strategy for different time periods.
Our study is important for both oil and gas industry investors and U.S. energy policy makers. The method that we used in this study offers a solution to the issue of selecting useful information from large datasets and absorbing updated market information.
Our study is important for both oil and gas industry investors and U.S. energy policy makers. The method that we used in this study offers a solution to the issue of selecting useful information from large datasets and absorbing updated market information.
Original language | English |
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Pages (from-to) | 672-686 |
Number of pages | 15 |
Journal | Energy Economics |
Volume | 81 |
Early online date | 2 May 2019 |
DOIs | |
Publication status | Published - Jun 2019 |
Bibliographical note
The authors are grateful for the funding support of the University of Aberdeen Elphinstone Scholarship for this research. The authors thank the Associate Editor and two referees for their critical comments that have led to significant improvements of the paper.Keywords
- Excess stock return
- U.S. Oil and gas industry
- Probit model
- Market timing
- Big data
- US Oil and gas industry
- MARKET
- PERFORMANCE
- INFORMATION
- TRADING RULE PROFITS
- RISK EXPOSURE
- CLASSIFICATION
- SHARPE
- MODEL SELECTION
- CANADIAN OIL
- PRICE RISK
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Alexander Kemp
- Engineering, National Decommissioning Centre
- Centre for Energy Transition
- Business School, Economics - Professor of Petroleum Economics and Director of Aberdeen Centre for R
- Business School, Aberdeen Centre for Research in Energy Economics and Finance (ACREEF)
Person: Academic