Oil price risk and the cross‐section of stock returns in Turkey.

This paper tests whether the oil price risk influence the cross‐section of stock returns in a net oil importing country even after controlling for standard risk factors to stock returns. The paper also tests the relative contribution of the oil price risk to the performance of factor‐based asset pricing models to explain the average returns. Using firm‐level data from Turkey, changes in monthly crude oil prices per barrel of oil is, respectively, added to the Capital Asset Pricing Model (CAPM), three‐factor (3F) model and five‐factor (5F) model and tested against the returns of portfolios constructed based on different firm‐specific fundamentals. The results indicate that the oil price risk factor extracts significant coefficients in the cross‐sectional regressions when conditioned against the returns even after controlling for the market and firm‐specific risk factors. But, the asset pricing summary statistics used to evaluate the relative contribution of the oil price risk suggest that it cannot improve the relative performance of the base asset pricing equations to explain the average stock returns. The results reveal the effectiveness of the factor models to capture the effect of the oil price risk on average returns. The traditional 3F equation offers the highest potential among the models tested. [ABSTRACT FROM AUTHOR]