Title: A comparison of energy stock return models using Pitman closeness criterion

Authors: Gwendolyn Pennywell; Alan Chow; Victoria Javine

Addresses: Economics & Finance Faculty, University of South Alabama, Mobile, Alabama 36688, USA ' Management Faculty, University of South Alabama, Mobile, Alabama 36688, USA ' Economics & Finance Faculty, University of Alabama, Tuscaloosa, Alabama 35487, USA

Abstract: This paper compares the performance of stock return models for firms in the energy and various other industries. Using Pitman closeness criterion, we evaluate the performance of several popular pricing models, in an effort to determine if one outperforms the others. Consistent with previous literature, a review of the models and their performance over time, indicate that the Fama-French three-factor model and the Carhart four-factor models alternate as better predictors of cross-sectional stocks returns. When the study is restricted to more recent data, the Carhart model outperforms the other models for more portfolios. Additionally, by using a shock in the energy industry, we found that the model choice is indeed sensitive to the industry.

Keywords: asset pricing models; model specification; Pitman closeness; mining; extraction; refining; gas utilities; pipelines; energy stock returns; stock return models; modelling; industry sensitivity.

DOI: 10.1504/IJSS.2014.067350

International Journal of Services and Standards, 2014 Vol.9 No.2/3/4, pp.87 - 102

Received: 31 May 2014
Accepted: 28 Aug 2014
Published online: 06 Feb 2015 *

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