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On the macroeconomic determinants of long-term volatilities and correlations in U.S. stock and crude oil markets

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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 that contain information on current and future economic activity are helpful predictors of changes in the oil–stock correlation. For the period 1993–2011 there is a strong evidence for 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.

Suggested Citation

  • Conrad, Christian & Loch, Karin & Rittler, Daniel, 2014. "On the macroeconomic determinants of long-term volatilities and correlations in U.S. stock and crude oil markets," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 26-40.
  • Handle: RePEc:eee:empfin:v:29:y:2014:i:c:p:26-40
    DOI: 10.1016/j.jempfin.2014.03.009
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    Cited by:

    1. Antonakakis, Nikolaos & Gupta, Rangan & Kollias, Christos & Papadamou, Stephanos, 2017. "Geopolitical risks and the oil-stock nexus over 1899–2016," Finance Research Letters, Elsevier, vol. 23(C), pages 165-173.
    2. repec:eee:eneeco:v:68:y:2017:i:c:p:240-254 is not listed on IDEAS
    3. repec:eee:ecmode:v:66:y:2017:i:c:p:139-145 is not listed on IDEAS
    4. Nguyen, Duc Khuong & Walther, Thomas, 2017. "Modeling and forecasting commodity market volatility with long-term economic and financial variables," MPRA Paper 84464, University Library of Munich, Germany, revised Jan 2018.
    5. Yin, Libo & Zhou, Yimin, 2016. "What drives long-term oil market volatility? Fundamentals versus Speculation," Economics Discussion Papers 2016-2, Kiel Institute for the World Economy (IfW).
    6. repec:eee:finlet:v:24:y:2018:i:c:p:56-63 is not listed on IDEAS
    7. Salisu, Afees A. & Oloko, Tirimisiyu F., 2015. "Modeling oil price–US stock nexus: A VARMA–BEKK–AGARCH approach," Energy Economics, Elsevier, vol. 50(C), pages 1-12.
    8. repec:eee:ecmode:v:68:y:2018:i:c:p:586-598 is not listed on IDEAS
    9. repec:eee:empfin:v:43:y:2017:i:c:p:130-142 is not listed on IDEAS
    10. repec:eee:eneeco:v:68:y:2017:i:c:p:141-150 is not listed on IDEAS
    11. Joo, Young C. & Park, Sung Y., 2017. "Oil prices and stock markets: Does the effect of uncertainty change over time?," Energy Economics, Elsevier, vol. 61(C), pages 42-51.
    12. repec:agh:journl:v:18:y:2017:i:2:p:165-181 is not listed on IDEAS
    13. Alessandra Amendola & Vincenzo Candila & Antonio Scognamillo, 2017. "On the influence of US monetary policy on crude oil price volatility," Empirical Economics, Springer, vol. 52(1), pages 155-178, February.

    More about this item

    Keywords

    Oil–stock relationship; Long-term volatility; Long-term correlation; GARCH-MIDAS; DCC-MIDAS;

    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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