Oil returns and volatility: The role of mergers and acquisitions

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Authors

Bos, Martijn
Demirer, Riza
Gupta, Rangan
Tiwari, Aviral Kumar

Journal Title

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Publisher

Elsevier

Abstract

This paper provides a novel perspective to the oil-stock market nexus by examining the predictive ability of mergers and acquisitions (M&A) over West Texas Intermediate (WTI) oil returns and volatility using a nonparametric quantile-based methodology. Our findings suggest that M&A activity carries significant predictive power over oil return and volatility, while predictability displays remarkably distinct patterns across various quantiles representing normal, bull and bear market states. We also observe that M&A activity by oil firms, i.e. both the acquiring and target firms considered active in the oil and gas (O&G) industry, generally carries greater predictive power over both oil returns and volatility compared to M&A activity by non-oil acquirers, i.e. acquirers that have entered the O&G industry by buying an oil company. Our findings imply that M&A activity in the O&G industry carries valuable fundamental information regarding future expectations on oil price dynamics and should be taken into account in forecasting exercises.

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Keywords

Mergers and acquisitions (M&A), Oil returns and volatility, Oil and gas industry, Nonparametric quantile causality, West Texas intermediate (WTI), Predictive power, Predictive abilities, Oil companies, Bull and bear markets, Crude oil, Commerce

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Citation

Bos, M., Demirer, R., Gupta, R. & Tiwari, A.K. 2018,'Oil returns and volatility: The role of mergers and acquisitions', Energy Economics, vol. 71, pp. 62-69.