Crude Oil Prices, Risk Preferences, and Intertemporal Variation in Market Expected Returns: Empirical Evidence from the Nigerian Stock Exchange (NSE)

TLDR: In this article, Obrimah et al. find that oil prices affect market or portfolio expected returns on the NSE only via changes induced in the risk preferences of the "representative agent" that has exposure to both stock market return volatility risk and oil price risk.

Abstract: I find oil prices affect market or portfolio expected returns on the NSE only via changes induced in the risk preferences of the "representative agent" that has exposure to both stock market return volatility risk and oil price risk. This finding indicates oil prices do not affect portfolio returns on the NSE independent of their effects on the representative agent's risk preferences. In so far as the risk preference of the representative agent is concerned, empirical results characterize this agent as an hedging agent; that is, an agent who at the margin accepts negative risk premiums for market volatility risk. In empirical tests that substitute a portfolio subset of the NSE (the "OAH portfolio") whose pricing is shown to be characterized by risk aversion and skewness preference in Obrimah et al. (2015), the representative agent who holds the OAH portfolio and has exposure to oil price risk is a risk averse agent who at the margin demands positive risk premiums for market volatility risk. Combined, empirical findings imply the presence of multiple representative agents that have exposure to both stock market return volatility risk and oil price risk within the Nigerian Stock Exchange.