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

Abstract

This work presents a novel approach to determining the risk and return of crude oil stocks by employing Arbitrage Pricing Theory and Quantile Regression. Arbitrage Pricing Theory identifies the risk factors likely to impact crude oil returns. Subsequently, Quantile Regression estimates the relationship between the selected factors and the returns across different distribution quantiles. The West Texas Intermediate (WTI) crude oil price is used in this study as a benchmark for crude oil prices. WTI’s price fluctuations can significantly impact the performance of global crude oil stocks and, subsequently, the global economy. Various statistical measures are used in this study to determine the proposed model's stability. The results show that changes in WTI returns can have varying effects depending on market conditions and levels of volatility. This study emphasizes the influence of structural discontinuities on returns. These are likely generated by changes in the global economy and the unpredictable demand for crude oil during the pandemic. The inclusion of pandemic, geopolitical, and inflation-related explanatory variables adds uniqueness to the study as it considers current global events that can affect crude oil returns. Findings show that the key factors that pose significant 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 investment decisions in WTI futures, investors should pay particular attention to these elements. © 2024, Politeknik Negeri Padang. All rights reserved.