Econometric Model Using Arbitrage Pricing Theory and Quantile Regression to Estimate the Risk Factors Driving Crude Oil Returns

TL;DR

This paper introduces a novel econometric approach combining Arbitrage Pricing Theory and Quantile Regression to identify and analyze the key risk factors affecting crude oil returns, considering current global economic influences.

Contribution

It integrates APT and QR methods to analyze crude oil risk factors, incorporating recent global events like pandemics and geopolitical issues for a comprehensive risk assessment.

Findings

Key risk factors include industrial production, inflation, energy prices, yield curve shape, and policy uncertainty.

WTI return effects vary with market conditions and volatility levels.

Structural breaks due to global events significantly impact crude oil returns.

Abstract

This work adopts a novel approach to determine the risk and return of crude oil stocks by employing Arbitrage Pricing Theory (APT) and Quantile Regression (QR).The APT identifies the underlying risk factors likely to impact crude oil returns.Subsequently, QR estimates the relationship between the factors and the returns across different quantiles of the distribution. The West Texas Intermediate (WTI) crude oil price is used in this study as a benchmark for crude oil prices. WTI price fluctuations can have a significant impact on the performance of crude oil stocks and, subsequently, the global economy.To determine the proposed models stability, various statistical measures are used in this study.The results show that changes in WTI returns can have varying effects depending on market conditions and levels of volatility. The study highlights the impact of structural discontinuities on returns, which can be caused by changes in the global economy and the demand for crude oil.The inclusion of pandemic, geopolitical, and inflation-related explanatory variables add uniqueness to this study as it considers current global events that can affect crude oil returns.Findings show that the key factors that pose major risks to returns are industrial production, inflation, the global price of energy, the shape of the yield curve, and global economic policy uncertainty.This implies that while making investing decisions in WTI futures, investors should pay particular attention to these elements