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The Effect Of Energy Prices On Transportation And Storage Sector’s Equity Returns: The Iranian Case

4778 words - 20 pages

THE EFFECT OF ENERGY PRICES ON TRANSPORTATION AND STORAGE SECTOR’S EQUITY RETURNS: THE IRANIAN CASE
by

ABSTRACT The purpose of this study is to examine the effect of oil and gas prices on transportation and storage sector’s equity returns in Iran. To this end, we analyze Iranian transportation and storage sector index for the period from the first week of January 2005 until the third week of March 2010. Based on the multifactor model and using time-series regression, our findings indicate that oil price is not an important determinant of returns in transportation and storage sector. Similarly, the findings suggest that gas price movements do not seem to play a role for transportation and ...view middle of the document...

Iran’s economy relies heavily on oil export revenues, which represents some 80-90 percent of total export earnings, 40-50 percent of the government budget and the oil sector made up 30-40 percent of GDP (Global Monitor Information, 2010). Moreover, Iran’s domestic oil consumption is 1.7 million barrels per day and the country spends over US$2 billion per year to import some refined oil products (Global Monitor Information, 2010). In addition, natural gas accounts for nearly half of Iran’s total energy consumption. Therefore, the energy reliance makes the Iranian economy vulnerable

to fluctuations in energy prices. In particular, Iran’s stock market is likely to be susceptible to change in energy prices in different ways: first, energy price (particularly, oil price) increases positively affect earnings, government budget revenues and expenditures and aggregate demand for Iran (as an energy exporting country), and thus positively affect corporate income and stock prices (Onour, 2007; Bjørnland, 2009; Arouri, 2010). Second, energy price increases can be synonyms of high expected inflation pressure and money supply, which in turn affect the discount rate and therefore negatively influence stock prices in oil exporting countries (Bjørnland, 2009; Arouri, 2010). Third, higher energy prices put upward pressures on the domestic currency which in turn reduce firms’ exports, and thus negatively affect firm income and stock prices (Haldane, 1997). Forth, higher energy prices might affect the Iranian stock market through a rise in the cost of production of goods and services in the industrial countries which are the main exporters of capital goods and inputs (such as machinery, transport equipment, chemicals) to Iran. Therefore, it is expected that higher energy prices indirectly impact on Iranian firms’ production costs, inducing firms to lower output, reduction of firms’ profits and consequently reduce firms’ future cash flows and stock returns. Fifth, an increase in energy price and the reduction in output and income may induces rational consumers to hold back on consumption and investment spending, reducing aggregate demand and output, which may reduce firms’ income and consequently place downward pressures on industries’ equity returns (Bjørnland, 2009; Nandha & Faff, 2008). In short, rising (falling) energy prices should reduce (increase) firms’ discounted expected future cash flows and consequently influence on Iranian industry stock returns. While past studies have provided some evidences that energy prices (particularly oil prices) have impact on stock returns across industries (see for example, Oberndorfer, 2009; McSweeney & Worthington; 2008), to the best of our knowledge, it is surprising that no recent work is known in the Iranian context. However, the published daily data on Tehran’s industry stock indices since 2005 make such a study possible. Therefore, our study is considered very beneficial as it provides insights regarding...

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