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A Test of a TwoFactor Market and Oil Pricing Model

A Test of a TwoFactor Market and Oil Pricing Model In this paper we employ a GMMbased approach to test the restrictions imposed by a twofactor market and oil pricing model when a riskfree asset is assumed to exist. We examine the Australian market which has several interesting features including selfsufficiency 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

A Test of a TwoFactor Market and Oil Pricing Model

Pacific Accounting Review , Volume 12 (1): 17 – Jan 1, 2000

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0114-0582
DOI
10.1108/eb037949
Publisher site
See Article on Publisher Site

Abstract

In this paper we employ a GMMbased approach to test the restrictions imposed by a twofactor market and oil pricing model when a riskfree asset is assumed to exist. We examine the Australian market which has several interesting features including selfsufficiency 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.

Journal

Pacific Accounting ReviewEmerald Publishing

Published: Jan 1, 2000

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