ERASMUS UNIVERSITY ROTTERDAM ERASMUS SCHOOL OF ECONOMICS MSc Economics & Business Master Specialisation Financial Economics The Influence of OPEC Meetings on Abnormal Returns During Times of High Volatility or Prices Author: A. Elias Student number: 353318 Thesis supervisor: J. Lemmen Finish date: November 2016 PREFACE AND ACKNOWLEDGEMENTS Starting of I would to express my appreciation for the guidance of Dr. Lemmen who was there every step of the way in writing this thesis and thoroughly reviewed every new version in a timely fashion. The writing of the thesis took longer than I expected but I am happy about what I have accomplished. The help from my family was invaluable and I would like to thank them for being there at each step and for their support. NON-PLAGIARISM STATEMENT By submitting this thesis the author declares to have written this thesis completely by himself/herself, and not to have used sources or resources other than the ones mentioned. All sources used, quotes and citations that were literally taken from publications, or that were in close accordance with the meaning of those publications, are indicated as such. COPYRIGHT STATEMENT The author has copyright of this thesis, but also acknowledges the intellectual copyright of contributions made by the thesis supervisor, which may include important research ideas and data. Author and thesis supervisor will have made clear agreements about issues such as confidentiality. Electronic versions of the thesis are in principle available for inclusion in any EUR thesis database and repository, such as the Master Thesis Repository of the Erasmus University Rotterdam ii ABSTRACT This thesis examines the effect of OPEC announcements on abnormal returns in five industries during periods of high and low oil prices and during periods of high and low oil price volatility. In order to assess the impact of OPEC announcements, an event study methodology was used. It is found that industries which are more closely related to the oil price show a higher likelihood of presenting abnormal returns than companies which are not related to the oil price. During periods of high oil prices, you are more likely to obtain a positive abnormal returns in the short run (-5,5). This abnormal return turns negative in the longer run (-20,20). During periods of higher oil price volatility in the short run (-5,5) there are higher positive abnormal returns but in the long run (-20,20) these disappear. Keywords: Crude oil; Event study; OPEC; Abnormal return; CAAR. JEL Classification: D82, L71, G14, O19. iii TABLE OF CONTENTS PREFACE AND ACKNOWLEDGEMENTS ....................................................................................... ii ABSTRACT .......................................................................................................................................... iii TABLE OF CONTENTS ...................................................................................................................... iv LIST OF TABLES ............................................................................................................................... vii LIST OF FIGURES ............................................................................................................................... ix CHAPTER 1 Introduction ...................................................................................................................... 1 CHAPTER 2 Literature review .............................................................................................................. 3 2.1 History and workings of OPEC ................................................................................................... 3 2.2 Research on OPEC ....................................................................................................................... 4 2.3 The oil price and macroeconomic indicators ............................................................................... 6 2.4 The oil price and the stock market ............................................................................................... 7 2.5 Signalling role and abnormal return of OPEC announcements ................................................... 9 CHAPTER 3 Hypothesis development ................................................................................................ 12 CHAPTER 4 Data and Methodology ................................................................................................... 14 4.1 Data ............................................................................................................................................ 14 4.1.1 OPEC meetings .................................................................................................................... 14 4.1.2 Stock market data ................................................................................................................ 14 4.1.3 Oil price data ....................................................................................................................... 15 4.2 Methodology .............................................................................................................................. 15 4.2.1 Categorizing OPEC meetings .............................................................................................. 16 4.2.2 Event study .......................................................................................................................... 16 4.2.3 Constant mean return model ................................................................................................ 17 4.2.4 Market model ....................................................................................................................... 17 iv 4.2.5 Models estimation and hypothesis testing ........................................................................... 18 4.2.6 Comparing the results .......................................................................................................... 20 4.3 Testing abnormal returns ........................................................................................................... 21 4.3.1 T1 Cross-sectional T-test ..................................................................................................... 21 4.3.2 T2 Time-series standard deviation or crude dependence test .............................................. 22 4.3.3 T3 Standardized cross-sectional or BMP test ...................................................................... 22 4.3.4 T4 Sign test .......................................................................................................................... 23 4.3.5 T5 Wilcoxon signed rank test .............................................................................................. 24 CHAPTER 5 Results ............................................................................................................................ 25 5.1 Classification of events .............................................................................................................. 25 5.2 Oil & Gas index ......................................................................................................................... 26 5.2.1 Events classified on the oil price ......................................................................................... 27 5.2.2 Events classified on the oil price volatility .......................................................................... 31 5.3 Utilities index ............................................................................................................................. 34 5.3.1 Events classified on the oil price ......................................................................................... 35 5.3.2 Events classified on the oil price volatility .......................................................................... 38 5.4 Basic materials index ................................................................................................................. 42 5.4.1 Events classified on the oil price ......................................................................................... 42 5.4.2 Events classified on the oil price volatility .......................................................................... 46 5.5 Industrials index ......................................................................................................................... 50 5.5.1 Events classified on the oil price ......................................................................................... 50 5.5.2 Events classified on the oil price volatility .......................................................................... 54 v 5.6 Technology index ....................................................................................................................... 57 5.6.1 Events classified on the oil price ......................................................................................... 57 5.6.2 Events classified on the oil price volatility .......................................................................... 61 CHAPTER 6 Robustness test ............................................................................................................... 65 CHAPTER 7 Conclusion...................................................................................................................... 67 REFERENCES ..................................................................................................................................... 70 APPENDIX A Geographical distribution of indexes used ................................................................... 75 Appendix A1 Oil & Gas index composition .................................................................................... 75 Appendix A2 Utilities index composition........................................................................................ 77 Appendix A3 Basic Materials index composition ........................................................................... 80 Appendix A4 Industrials index composition.................................................................................... 84 Appendix A5 Technology index composition ................................................................................. 94 vi LIST OF TABLES Table 1 Comparison of different event studies and their conclusions ................................................... 11 Table 2 Comparison of different academic event studies based on the length of estimation/event window and market index ..................................................................................................................... 18 Table 3 AAR results for the oil & gas index classified on price .......................................................... 28 Table 4 CAAR results for the oil & gas index classified on price ........................................................ 30 Table 5 Equal means test and Levene test on the oil & gas index classified on price .......................... 30 Table 6 AAR results for the oil & gas index classified on volatility ..................................................... 32 Table 7 CAAR results for the oil & gas index classified on volatility .................................................. 33 Table 8 Equal means test and Levene test on the oil & gas index classified on volatility ................... 33 Table 9 AAR results for the utilities index classified on price .............................................................. 36 Table 10 CAAR results for the utilities index classified on price ......................................................... 37 Table 11 Equal means test and Levene test on the utilities index classified on price .......................... 37 Table 12 AAR results for the utilities index classified on volatility .................................................... 39 Table 13 CAAR results for the utilities index classified on volatility................................................... 41 Table 14 Equal means test and Levene test on the utilities index classified on volatility ..................... 41 Table 15 AAR results for the basic materials index classified on price ................................................ 43 Table 16 CAAR results for the basic materials index classified on price ............................................. 45 Table 17 Equal means test and Levene test on the basic materials index classified on price ............... 45 Table 18 AAR results for basic materials index classified on volatility ............................................... 47 Table 19 CAAR results for the basic materials index classified on volatility ....................................... 49 Table 20 Equal means test and Levene test on the basic materials index classified on volatility ......... 49 vii Table 21 AAR results for the industrials index classified on price ....................................................... 51 Table 22 CAAR results for the industrials index classified on price .................................................... 53 Table 23 Equal means test and Levene test on the industrials index classified on price ...................... 53 Table 24 AAR results for industrials index classified on volatility ...................................................... 55 Table 25 CAAR results for the industrials index classified on volatility .............................................. 56 Table 26 Equal means test and Levene test on industrials index classified on volatility ...................... 57 Table 27 AAR results for the technology index classified on price ...................................................... 59 Table 28 CAAR results for the technology index classified on price ................................................... 60 Table 29 Equal means test and Levene test on technology index classified on price ........................... 60 Table 30 AAR results for technology index classified on volatility ..................................................... 62 Table 31 CAAR results for the technology index classified on volatility ............................................. 64 Table 32 Equal means test and Levene test on the technology index classified on volatility ............... 64 Table 33 Summary of the different price scenario's in different industries ........................................... 67 Table 34 Summary of different volatility scenario's in the different industries .................................... 68 viii LIST OF FIGURES Figure 1 Oil price through time classified on price and price adjusted for inflation. ............................ 25 Figure 2 Pie chart of OPEC meetings classified on price ..................................................................... 25 Figure 3 Oil price through time classified on volatility ........................................................................ 26 Figure 4 Pie chart of OPEC meetings classified on volatility ............................................................... 26 Figure 5 Oil & Gas index price reaction to OPEC meetings AAR, classified on price ........................ 27 Figure 6 Oil & gas index price reaction to OPEC meetings CAAR price classification ....................... 29 Figure 7 Oil & gas index price reaction to OPEC meetings AAR classified on volatility .................... 31 Figure 8 Oil & gas index price reaction to OPEC meetings CAAR classified on volatility ................. 33 Figure 9 Utilities index price reaction to OPEC meetings AAR classified on price ............................. 35 Figure 10 Utilities index price reaction to OPEC meetings CAAR classified on price ........................ 37 Figure 11 Utilities index price reaction to OPEC meetings AAR classified on volatility .................... 38 Figure 12 Utilities index price reaction to OPEC meetings CAAR classified on volatility .................. 40 Figure 13 Basic materials index price reaction to OPEC meetings AAR classified on price ............... 42 Figure 14 Basic materials index price reaction to OPEC meetings CAAR classified on price ............ 44 Figure 15 Basic materials index price reaction to OPEC meetings AAR classified on volatility ......... 46 Figure 16 Basic materials index price reaction to OPEC meetings CAAR classified on volatility ..... 48 Figure 17 Industrials index price reaction to OPEC meetings AAR classified on price ....................... 50 Figure 18 Industrials index price reaction to OPEC meetings CAAR classified on price .................... 52 Figure 19 Industrials index price reaction to OPEC meetings AAR classified on volatility ................ 54 Figure 16 Industrials index price reaction to OPEC meetings CAAR classified on volatility .............. 56 Figure 21 Technology index price reaction to OPEC meetings AAR classified on price .................... 58 ix Figure 22 Technology index price reaction to OPEC meetings AAR classified on price ..................... 59 Figure 23 Technology index price reaction to OPEC meetings AAR classified on volatility .............. 61 Figure 24 Technology index price reaction to OPEC meetings CAAR classified on volatility ............ 63 Figure 25 Oil price through time classified on price and price adjusted for inflation. .......................... 65 Figure 26 Oil price through time classified on price using a 10 year moving average ......................... 66 Figure 27 Oil price through time classified on price using a 5 year moving average ........................... 66 x