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This paper investigates the relationship between stock prices of Japanese automobile manufacturers and crude oil prices. The thesis gives an idea how well the manufacturers perform while oil prices remains volatile and to what extend oil prices should be looked as a crucial benchmark for Japanese auto industry managers. A Fama and French three factor model which will extend to four factor of oil is used as methodology to study its influence on stock returns of Japanese automobile industries. The results exhibit that oil prices have a non-linear relationship with stock prices of Japanese auto companies. Surprisingly, the results were positive during the occurence of Iraq invasion 2003. Furthermore, the boom in sales sales of hybrid cars positively influence on stock prices of hybrid automakers when the recent rise in crude oil prices.
Keywords:
[Oil prices, Fama-French, Japan, Automobile manufacturers, Hybrid Cars]
http://www.aeaweb.org/journal/jel_class_system.html ]
PREFACE AND ACKNOWLEDGEMENTS 2
ABSTRACT 3
LIST OF TABLES 5
LIST OF FIGURES 6
1. Introduction 7
2. Literature Review 10
2.1. Oil prices and the economic growth 10
2.2. Oil prices and the stock market 11
2.3. Fama French three factor model 13
3. Research Motivation 15
4. Hypothesis 18
5. Data and Methodology 19
5.1. Data Description 19
5.2. Methodology 22
6. Results 27
6.1. Descriptive Statistics 27
28
6.2. Regression Results 29
6.3. The Influence of the Hybrid Car 32
7. Analyses and Interpretations 35
7.1. Unusual events as external factors 35
7.2. Hybrid cars as an internal factor 37
8. Conclusions 40
REFERENCES 42
LIST OF TABLES
Table 1: Market shares of the top automobile manufacturers from 2007 to 2010 16
Table 2: Toyota total sales of hybrid cars in Japan during fiscal year 2000–2010 (in thousand) 21
Table 3 : Time Phases for Iraq war, credit crisis, and booming sales of hybrid car 22
Table 4 : Summary statistics – full sample 27
Table 5: Correlations – full sample 27
Table 6: Regression results for the auto index 30
Table 7: Hybrid car index 32
Table 8: Regression results of Toyota index 33
Table 9: Regression results of Honda index 34
Table 10: Regression results of Toyota and Honda after booming till before the earthquake 34
LIST OF FIGURES
Figure 1: Major sources of crude oil imports by Japan 7
Figure 2: Dubai crude oil price from 2001-2011 26
Figure 3: Returns on the market index 28
Figure 4: Returns on the auto index 28
The world is dismal by recent histories. Ever since the credit crisis which was triggered by a liquidity shortfall in the USA banking system, most of predominant economies for both developed and developing countries were drowned in times of recession. This crisis is the worst tragedy since the great depression of 1929. Oil shocks have also contributed to global recessions in last thirty years. While the recent topic in news was regarding on political instabilities in the Egypt, this has aggravated the problems facing the global economy. The political risk weakens the value currency of the developing countries and moreover affects commodity prices. Out of the major commodities, crude oil is a sensitive commodity. Oil is a source of energy which is used in many routine activities of households or industries. It is used either as a raw material for various industries or consumed by the product of these industries which are proxy by energy prices and transportation prices respectively. Both prices influence cash flow and profitability where linked to the price of oil. Therefore, for all these reasons oil shocks and its relationship to the global economy receive important consideration on macroeconomic research.
The upsurge in the oil prices plays an important role which it would negatively affect the performance of automotive manufacturers (see for example Boudette and White, 2005 and Cameron and Schnusenberg, 2008). Richard Heinberg states that oil provides 97 percent of the transportation fuels that operate the vehicles in the nation’s highway. Thus, the increase in the oil prices also affect the type of vehicles demanded by the customer and the way those vehicles are designed. Consumers demand for more fuel vehicles seem reasonable as the oil prices continue to rise. The upsurge in the oil prices undoubtfully affects the profit margin of the companies. The auto manufacturers clearly concern fuel efficient cars because the automakers compete with each other to fullfill the consumers’ demands for more fuel efficient consumer conscious at reasonable price. While apart of the realization increased consumer demand for efficient vehicles, an investigation of the relationship between stock prices and oil prices of Japanese automobile manufacturers is also valuable.
The economy of Japan is the third largest in the world ($5.391 trillion) in terms of GDP and Purchasing Power Parity. However, Koike et al (2008) shows that Japan has limited domestic oil reserves. Consequently, Japan’s industrial sector relies heavily on overseas supplies and must import substantial amount of crude oil and natural gas. In 2009, Japan ranked second in terms of oil imported which came mainly from Middle East. Because of the country’s lack of domestic oil reserves, the Japanese oil companies have sought in participation in exploration and overseas oil production primarily located in the Middle East and South East Asia.
Figure 1: Major sources of crude oil imports by Japan
Source: EIA
Japan contributes a significant share and is accounted for a significant historical share of the emissions that have led to increase the global temperature. As such, it is fundamental that Japan and other industrialised nations adopt energy policies to reduce gas emissions. This point has factored high on Japan’s policy planners and other industrial countries who in 1997 negotiated in agreement so called Kyoto Protocol and came into force in 2005 which aims to reduce collective emissions of greenhouse gases by 5.2% relative to 1990 levels.
Japanese government has identified some sectors which energy-efficient that has need to be developed and implemented: transportation, commercial, and industrial. Focusing on the road transportation sector, its energy consumption was relatively stable until 1986, but has been increasing since that time. Dominantly, an increase in weight and size of vehicle, an increase in inhabitants’ activity, an increase in private car usage, and an increase in the family car’s fuel economy have increased transport sector fuel consumption. In order to increase the efficiency of energy, car emissions should be restricted, energy efficient vehicle should be initiated, and car travel should be shifted to public transport. Separately, fuel prices in Japan is tremendously expensive because gasoline is high taxed. Furthermore, by bearing high tax, the authorities may help to reduce greenhouse emissions and participate to combat climate change.
The purpose of this paper to investigate the relationship between crude oil prices and stock prices of Japanese automobile manufacturers. The returns will give an idea how well the automobile manufacturers perform while crude oil prices remain instable which have an effect on the profitablity of the stock prices’ of automobile manufacturers. Secondly, if whether oil prices should be considered as crucial benchmark for Japanese auto industry managers and Japanese policy authorities. This paper will use Fama and French three factor model which will extend to four factor of oil is included to study its influence on the stock returns of Japanese automobile industries.
The thesis is divided into eight chapters. In chapter 2, a literature study is conducted. I will concentrate on some literature which has been written on this particular topic. Many research has been done in the sector of impacts of oil prices on the stock prices to which we will refer during the thesis and use those papers as references. Chapter 3 explains the motivation to conduct the research. It gives specific details about Japanese market and current situation in there. In chapter 4, four hypotheses are conducted for our research. Some unusual events as external factors are tested in order to know whether they influence the relationship between the stock price and the oil price. Furthermore, we would like to conduct research whether an internal factor such as booming sales of hybrid cars effect the relationship in the midst upsurge in crude oil price.
Chapter 5 covers the research methodology part of the paper. The research is conducted based on the Cameron and Schnusenberg (2008) model. In this chapter, I examine how to construct all these regression variables. The auto index is constructed by taking price weighted average daily stock prices. The market index is conducted with data of the TOPIX index within a time range from December, 29 2000 until March 31, 2011. The TOPIX index is chosen because it is an important index for the Tokyo Stock Exchange (TSE) in Japan. The SMB and the HML are constructed based on the formula from Ken and French’s website. The oil index is calculated with data of the Middle East crude oil price. The net producers of the Middle East crude oil determine the export price of crude oil for Japan on the basis of the spot price for Dubai crude oil.
In chapter 6, the results of the regression are showed and, furthermore, interpret the results in the text. Chapter 7 presents some discussions about the result are given and I synchronize the regression results under the real circumstances. Furthermore, we serve some conclusion which is served in chapter 8.
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