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On the Macroeconomic Determinants of the Long-Term Oil-Stock Correlation

Author

Listed:
  • Conrad, Christian
  • Loch, Karin
  • Rittler, Daniel
Abstract
Using a modified DCC-MIDAS specification, we endogenize the long-term correlation between crude oil and stock price returns with respect to the stance of the U.S. macroeconomy. We find that variables which contain information on current and future economic activity are helpful predictors for changes in the oil-stock correlation. For the period 1993-2011 there is strong evidence for a counter cyclical behavior of the long-term correlation. For prolonged periods with strong growth above trend our model predicts a negative long-term correlation, while before and during recessions the sign changes and remains positive throughout the economic recovery. Our results strongly suggest that crude oil prices cannot be viewed as being exogenous with respect to the U.S. macroeconomy and explain the controversial results concerning the oil-stock relationship in previous studies.

Suggested Citation

  • Conrad, Christian & Loch, Karin & Rittler, Daniel, 2012. "On the Macroeconomic Determinants of the Long-Term Oil-Stock Correlation," Working Papers 0525, University of Heidelberg, Department of Economics.
    • Handle: RePEc:awi:wpaper:0525
    Note: This paper is part of http://archiv.ub.uni-heidelberg.de/volltextserver/view/schriftenreihen/sr-3.html
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Hossein Asgharian & Charlotte Christiansen & Ai Jun Hou, 2016. "Macro-Finance Determinants of the Long-Run Stock–Bond Correlation: The DCC-MIDAS Specification," Journal of Financial Econometrics, Oxford University Press, vol. 14(3), pages 617-642.
    2. Christian Conrad & Karin Loch, 2015. "Anticipating Long‐Term Stock Market Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(7), pages 1090-1114, November.
    3. Turhan, M. Ibrahim & Sensoy, Ahmet & Ozturk, Kevser & Hacihasanoglu, Erk, 2014. "A view to the long-run dynamic relationship between crude oil and the major asset classes," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 286-299.
    4. Julien, Chevallier & Sévi, Benoît, 2013. "A Fear Index to Predict Oil Futures Returns," Energy: Resources and Markets 156489, Fondazione Eni Enrico Mattei (FEEM).
    5. repec:dau:papers:123456789/11714 is not listed on IDEAS
    6. Emiliano Magrini & Ayca Donmez, 2013. "Agricultural Commodity Price Volatility and Its Macroeconomic Determinants: A GARCH-MIDAS Approach," JRC Research Reports JRC84138, Joint Research Centre.
    7. Mo, Di & Gupta, Rakesh & Li, Bin & Singh, Tarlok, 2018. "The macroeconomic determinants of commodity futures volatility: Evidence from Chinese and Indian markets," Economic Modelling, Elsevier, vol. 70(C), pages 543-560.

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    More about this item

    Keywords

    Oil-stock relationship; long-term volatility; long-term correlation; GARCH-MIDAS; DCC-MIDAS;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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