Connection between price elasticity and Beta: The case of the oil industry

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Publication Type honors thesis
School or College David Eccles School of Business
Department Finance
Faculty Mentor Uri Loewenstein
Creator Johnson, Stuart
Title Connection between price elasticity and Beta: The case of the oil industry
Description Price elasticity and Beta are cherished variables in Economics and Finance, respectively. Price elasticity is a measure of a percent change in the quantity of a good demanded divided by the percent change in its price. Beta is the covariance of a firm's return with respect to the market, divided by the variance of the market. Although they do not measure the same metric, as price elasticity is based against a price change, and Beta is based against a market return, there are suggestions that these variables like these could be related (Coles 1995). Data-driven statistical support is lacking, yet it is very common for Economists to generalize price elasticities of goods/services, based on the level of "need" intrinsic to the good. For example, a food store would have a more inelastic demand curve than a private yacht manufacturer. One could also postulate that an inelastic demand curve would result in a low Beta as well, and vice versa. One might expect that firms with low demand elasticity of its product would also have a low covariation of their returns with the market, and thus a low Beta. This paper seeks to test the connection between a firm's output demand elasticity and a firm's Beta, using the oil industry as a case study. Given its consistent use and demand, oil is a relatively inelastic good. Additionally, the copious price fluctuations and availability of data make this industry an easy subject for analysis. I hypothesize a direct correlation between price elasticity and Beta, such that a higher price elasticity begets a higher Beta, and a lower price elasticity begets a lower Beta. Using large sets of averages and indices as a benchmark for data collection and analysis, no such connection exists on any statistically significant level. Upon whittling the regression down to smaller parts, and dismissing outliers, I found a statistically significant connection between the price elasticity and Beta. However, because of these conflicting results, there is no truly conclusive evidence that such a connection exists.
Type Text
Publisher University of Utah
Subject Price elasticity of demand; Beta (Firm); Oil industries
Language eng
Rights Management (c) Stuart Johnson
Format Medium application/pdf
Format Extent 614,397 bytes
Permissions Reference URL
ARK ark:/87278/s6qc3crc
Setname ir_htoa
Date Created 2016-11-03
Date Modified 2018-08-24
ID 205891
Reference URL
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