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

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  • 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.

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Bibliographic Info

Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0525.

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Date of creation: 14 Mar 2012
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Handle: RePEc:awi:wpaper:0525

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Keywords: Oil-stock relationship; long-term volatility; long-term correlation; GARCH-MIDAS; DCC-MIDAS;

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References

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Cited by:
  1. Sévi, Benoît & Chevallier, Julien, 2013. "A Fear Index to Predict Oil Futures Returns," Economics Papers from University Paris Dauphine 123456789/11714, Paris Dauphine University.
  2. Conrad, Christian & Loch, Karin, 2012. "Anticipating Long-Term Stock Market Volatility," Working Papers 0535, University of Heidelberg, Department of Economics.

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