[THE IMPACT OF OIL PRICE AND INDUSTRIES INDICES RETURNS BASED ON ANALYSIS OF THE G7 COUNTRIES.]

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Acknowledgement

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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Abstract

The primary objective of this dissertation was to test the efficient market hypothesis by investigating the effect on prices of oil stocks of some industry-wide events from 1973 to 1983, when prices of crude oil rapidly rose or fell. It examined the process by which oil share prices adjusted to three separate events. This study was limited to the oil industry to provide sample homogeneity. Pursuant to this objective, the behavior of residual returns, derived from the market model and serving as the proxy for the abnormal performance of securities, was evaluated in terms of the average residuals and cumulative average residuals within the framework of the methodology of the residual analysis. A formal test of statistical significance on the average residuals was also performed to increase the precision of information tests. In response to changes in crude oil prices, results indicate that price movements precede the effective months. Slower price adjustments in digesting oil price information, however, occur at the event time. Further, price movements do not settle down to the normal market relationship subsequent to the event time. The market appears to be inefficient with respect to the public information embodied in the crude oil price changes. One of the implications of the findings in this dissertation is that this inefficiency in the oil industry could be due to the inappropriateness of the single-index model specification, and thus, security prices in the oil industry may be better represented by one of multipleindex models incorporating the industry factor as well. This implication is reinforced by both the King and Farrell studies indicating the existence of the industry effect in the oil industry.

ABSTRACT4

CHAPTER 1: INTRODUCTION6

1.1 General Statement of the Problem6

1.2 Objectives and Scope8

1.3 Plan of Action9

CHAPTER 2: LITERATURE REVIEW10

2.1 Efficient Market Hypothesis (EMH)10

2.2 Relationship between the Efficient Market Hypothesis (EMH) and14

the Capital Asset Pricing Model (CAPM)14

2.3 Energy Intensity of Consumption and Production19

2.4 The Impact on the Global Economy21

2.5 The Impact on Industrial Countries26

2.6 The Impact on Developing and Transition Economies31

2.7 Oil and the Macro economy32

2.8 Oil Prices and Stock Returns35

CHAPTER 3: DATA AND METHODOLOGY38

Testable Hypotheses38

Sample Characteristics40

Data Base40

Sample Period41

CHAPTER 4: EMPIRICAL RESULTS AND DISCUSSION45

Event #1 Study45

MAJOR CONCLUSIONS57

Summary57

Limitations of the Study58

REFERENCES60

APPENDIX64

CHAPTER 1: INTRODUCTION

1.1 General Statement of the Problem

The efficient market hypothesis (henceforth "EMH") asserts that security prices at any time "fully reflect" all relevant and available information in the capital market. By the words "fully reflect", it is meant that prices have already completely adjusted to levels in accordance with ...