The paper entitled “The Effect of Oil Supply Shocks on Industry Returns”, which was jointly written by our school’s Assistant Professor Wu Kai, as well as Professor Dayong Huanga and Assistant Professor Jay Y. Li of University of North Carolina at Greensboro, USA, has been officially accepted by the Journal of Commodity Markets, a world-famous financial journal.

The study of the causes and consequences of movements in oil prices is of great value to academicians, professional investors and monetary policy makers. People tend to anticipate how the changes in oil prices, particularly those associated with oil supply shocks, deliver an impact on asset prices. However, early literature found no significant relationship between oil price changes and stock returns. Recently, Baumeister and Hamilton (2019) have revisited the impact of oil supply shocks on stock returns by estimating oil supply, oil demand, and economic activity (aggregate demand) shocks in an incompletely identified Bayesian Structural VAR Model.

We examine how industry returns react to various oil shocks developed in Baumeister and Hamilton (2019) and find that oil supply shocks matter as much, if not more, as oil demand and economic activity shocks in driving industry returns. A long-short portfolio that buys (sells) industries benefiting (suffering) from negative oil supply shocks earns an initial abnormal monthly return of 0.88%. This return is corrected by sophisticated investors over time. We find no overreaction to oil demand and economic activity shocks. Our evidence corroborates the view that oil supply shocks matter and that retail investors tend to drive short-term overreaction.