Correlations between oil and stock markets : a wavelet-based approach
AbstractIn a global economy, shocks occurring in one market can spill over to other markets. This paper investigates the impact of oil shocks and stock markets crashes on correlations between stock and oil markets. We test changes in correlations at different scales with non-overlapping confidence intervals based on estimated wavelet correlations. Contrary to other approaches, this method does not need adjustment for heteroskedasticity biases on the correlation coefficients. Our results show that oil shocks affect the correlation between both markets. The evidence on the change of correlation between stock markets after an oil shock is weaker; except in some specific cases during the Kuwait war and the OPEC cutback period. Conversely, we only find weak evidence that stock market crashes change the correlation between oil and stock markets. Overall, the evidence gives support to including oil as an asset class in asset allocation strategies.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers with number ws130504.
Date of creation: Mar 2013
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Correlations; Financial shocks; International Financial Markets; Oil shocks; Stock Market Returns; Wavelets;
Find related papers by JEL classification:
- C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F30 - International Economics - - International Finance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-09 (All new papers)
- NEP-ENE-2013-03-09 (Energy Economics)
- NEP-FMK-2013-03-09 (Financial Markets)
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