The ultimate aim of any modern corporate is growth with profit maximization. Growth is the first and foremost characteristic of nature and its products which include modern societies with all their industrial, agricultural and service sectors and above all the research organizations to cater to the needs of primary, secondary and tertiary sectors. Governed by the laws of the universe and nature, societies, markets and above all human life are in the constant churn of development in the realm of creativity and innovativeness.

This paper examines the short run oil price sensitivity of stock market returns in three major South Asian countries, namely, India, Pakistan and Sri Lanka. By using a standard market model augmented with an oil price factor, the article analyzes 29 Indian, 17 Pakistani and 11 Sri Lankan industries. The authors use weekly DataStream industry/sector indices data over the sample period from January 1990 to June 2004 for India and Sri Lanka, but for Pakistan, data begins from July 1992 and ends on June 2004. Four Indian industries, namely, Electricity, Integrated Oil, Resources (Oil and Gas), and Utilities are found to have a statistically significant sensitivity to the oil price factor. For Pakistan and Sri Lanka, Banks is the only industry where the stock price returns appear to have statistically significant sensitivity to the oil price returns. However, none of these results appear to be consistent with the existing international evidence. Further, the study fails to find any support for the full sample results when the second half of the data is considered. Assigning more importance to relatively recent data (that is, ignoring the distant half of the sample period), the study concludes that oil price changes do not appear to have a significant short run influence on the stock market returns in the Indian, Pakistani and Sri Lankan stock markets. In fact, considering the regulated fuel pricing environment in all the three countries, this appears to be a most likely scenario. However, the results of the study are not conclusive so there is a need for further studies.

Oil is a major source of energy that is extensively used around the world. Oil price hikes appear to have a significant impact on economic development. The IMF and the OECD sources1 suggest that a US$10 price rise is consistent with the loss of 0.5% of world GDP in the first year. This drag on economic growth may reflect on share prices of the companies that are sensitive to oil price changes. Media reports in relation to recent oil price hikes appear to indicate that oil prices play some role in influencing the financial markets, though no one seems sure about the exact nature and magnitude of this impact.

Academic studies also support a similar view and argue the need for research in this area. For example, Jones and Kaul (1996, p. 464) comment “Given the importance of oil to the world economy, it is surprising that little research has been conducted on the effects of oil shocks on the stock market.” Their study shows that oil price hikes have a detrimental effect on output and stock returns in the United States, Canada, Japan and the United Kingdom. Faff and Brailsford (1999) report significant oil price sensitivityacross some Australian industries. Their findings suggest a significant positive oil price sensitivity of Australian Oil and Gas, and Diversified Resources industries. On the other side, industries like Paper and Packaging, and Transport appear to have a significant negative sensitivity to oil price hikes.