Is Oil A Financial Asset? An Empirical Investigation Spanning the Last Fifteen Years
AbstractThe growing presence of financial operators in the oil markets has modified oil price dynamics. The diffusion of techniques based on extrapolative expectations – such as feedback trading – leads to departures of prices from their fundamental values and increases their variability. Oil price changes are here associated with changes in stocks, bonds and effective USD exchange rate. The feedback trading mechanism is combined with an ICAPM and provides a model which is then estimated in a CCC GARCH-M framework, both the risk premium and the feedback trading components of the conditional means being nonlinear functions of the system’s conditional variances and covariances. The empirical analysis identifies a structural change in the year 2000. From then on oil returns tend to become more reactive to the remaining assets of the model and feedback trading more pervasive. A comparison is drawn between three and four asset minimum variance portfolios in the two sub-periods, 1992-1999 and 2000-2008. Oil acquires in the second period, besides its standard properties as a physical commodity, the characteristics of a financial asset. Indeed, the trade-off between risk and returns – measured here by the average return per unit of risk index – indicates that in the last decade oil diversifies away the empirical risk of our portfolio.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze dell'Economia e Dell'Impresa in its series Working Papers Series with number wp2009_12.rdf.
Length: 29 pages
Date of creation: 2009
Date of revision:
oil price dynamics; oil price dynamics; feedback trading; multivariate GARCH-M; portfolio allocation.;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sentana, Enrique & Wadhwani, Sushil B, 1992. "Feedback Traders and Stock Return Autocorrelations: Evidence from a Century of Daily Data," Economic Journal, Royal Economic Society, vol. 102(411), pages 415-25, March.
- Engle, Robert F & Ng, Victor K, 1993.
" Measuring and Testing the Impact of News on Volatility,"
Journal of Finance,
American Finance Association, vol. 48(5), pages 1749-78, December.
- Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
- John R. Nofsinger & Richard W. Sias, 1999. "Herding and Feedback Trading by Institutional and Individual Investors," Journal of Finance, American Finance Association, vol. 54(6), pages 2263-2295, December.
- Shaun K. Roache, 2008. "Commodities and the Market Price of Risk," IMF Working Papers 08/221, International Monetary Fund.
- Geman, Hélyette & Kharoubi, Cécile, 2008. "WTI crude oil Futures in portfolio diversification: The time-to-maturity effect," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2553-2559, December.
- Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990.
"Speculative Dynamics and the Role of Feedback Traders,"
American Economic Review,
American Economic Association, vol. 80(2), pages 63-68, May.
- Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics And The Role Of Feedback Traders," Working papers 545, Massachusetts Institute of Technology (MIT), Department of Economics.
- David M. Cutler & James M. Poterba & Lawrence H. Summers, 1991. "Speculative Dynamics and the Role of Feedback Traders," NBER Working Papers 3243, National Bureau of Economic Research, Inc.
- Warren Dean & Robert Faff, 2011. "Feedback trading and the behavioural ICAPM: multivariate evidence across international equity and bond markets," Applied Financial Economics, Taylor and Francis Journals, vol. 21(22), pages 1665-1678.
- Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.
- Gregory Koutmos & Reza Saidi, 2001. "Positive feedback trading in emerging capital markets," Applied Financial Economics, Taylor and Francis Journals, vol. 11(3), pages 291-297.
- Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Cowles Foundation Discussion Papers 719R, Cowles Foundation for Research in Economics, Yale University.
- Jobson, J D & Korkie, Bob M, 1981. "Performance Hypothesis Testing with the Sharpe and Treynor Measures," Journal of Finance, American Finance Association, vol. 36(4), pages 889-908, September.
- Nikolaos Milonas & Thomas Henker, 2001. "Price spread and convenience yield behaviour in the international oil market," Applied Financial Economics, Taylor and Francis Journals, vol. 11(1), pages 23-36.
- Donald W.K. Andrews, 1990.
"Tests for Parameter Instability and Structural Change with Unknown Change Point,"
Cowles Foundation Discussion Papers
943, Cowles Foundation for Research in Economics, Yale University.
- Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
- Koutmos, Gregory, 1997. "Feedback trading and the autocorrelation pattern of stock returns: further empirical evidence," Journal of International Money and Finance, Elsevier, vol. 16(4), pages 625-636, August.
- Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giorgio Ricchiuti).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.