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

Robert W. Faff, Timothy J. Brailsford

    Research output: Contribution to journalArticlepeer-review

    13 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

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