A test of a two-factor ‘market and oil’ pricing model

Robert W. Faff, Timothy J. Brailsford

Research output: Contribution to journalArticleResearchpeer-review

12 Citations (Scopus)

Abstract

In this paper we employ a GMM-based approach to test the restrictions imposed by a two-factor ‘market and oil’ pricing model when a risk-free asset is assumed to exist. We examine the Australian market which has several interesting features including self-sufficiency in relation to oil, a large concentration of natural resource companies, susceptibility to the ‘Dutch disease’ and a diverse industry base. We extend previous literature by examining industry sector equity returns as different industry groups are likely to have different exposures to an oil factor, particularly in Australia. In the formal tests, we find evidence in favour of the model, particularly for industrial sector industries. The preferred model includes a domestic portfolio proxy for market returns in addition to the oil price factor and we find evidence of a positive market risk premium as well as a significantly priced oil factor.

Original languageEnglish
Pages (from-to)61-77
Number of pages17
JournalPacific Accounting Review
Volume12
Issue number1
DOIs
Publication statusPublished - 1 Jan 2000
Externally publishedYes

Fingerprint

Dive into the research topics of 'A test of a two-factor ‘market and oil’ pricing model'. Together they form a unique fingerprint.

Cite this