THE EFFECT OF ENERGY PRICES ON TRANSPORTATION AND STORAGE SECTOR’S EQUITY RETURNS: THE IRANIAN CASE by ABSTRACT The purpose of this study is to examine the effect of oil and gas prices on transportation and storage sector’s equity returns in Iran. To this end, we analyze Iranian transportation and storage sector index for the period from the first week of January 2005 until the third week of March 2010. Based on the multifactor model and using time-series regression, our findings indicate that oil price is not an important determinant of returns in transportation and storage sector. Similarly, the findings suggest that gas price movements do not seem to play a role for transportation and storage sector. However, consistent with the capital asset pricing model (CAPM), the market portfolio is a significant pricing factor in the sector’s stock returns. In addition, the estimated regression indicates that the exchange rate is not priced for this sector’s stock returns. The results of this study help domestic and potential foreign investors to understand the effect of energy price changes on transportation and storage sector stock returns in order to manage their portfolio effectively. KEYWORDS Energy prices, Transportation and storage sector, Equity returns, Iran INTRODUCTION Recent years have witnessed massive price movements of the energy markets. The price of energy has a large impact on economy of the world (Huang et al., 1996; Nandha & Brooks, 2009; Chen et al., 1986; Nandha & Faff, 2008). The EIA report (2007) indicates that higher oil prices affect national economies both internally and in their interactions with other nations through exports and imports. In fact, oil price changes affect economic activity, earnings, inflation, monetary policy as well as asset prices and financial markets (Mussa, 2000). The effect of energy price changes in an economy can be