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Oil price density forecasts: Exploring the linkages with stock markets

  • Francesco Ravazzolo

    ()

  • Marco J. Lombardi

    ()

In the recent years several commentators hinted at an increase of the correlation between equity and commodity prices, and blamed investment in commodity-related products for this. First, this paper investigates such claims by looking at various measures of correlation. Next, we assess to what extent correlations between oil and equity prices can be exploited for asset allocation. We develop a time-varying Bayesian Dynamic Conditional Correlation model for volatilities and correlations and find that joint modelling of oil and equity prices produces more accurate point and density forecasts for oil which lead to substantial benefits in portfolio wealth.

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File URL: http://www.bi.edu/InstitutterFiles/Samfunns%C2%B0konomi/CAMP/Working_CAMP_3-2012.pdf
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Paper provided by Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School in its series Working Papers with number 0008.

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Length: 29 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:bny:wpaper:0008
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  1. Shmuel Kandel & Robert F. Stambaugh, 1995. "On the Predictability of Stock Returns: An Asset-Allocation Perspective," NBER Working Papers 4997, National Bureau of Economic Research, Inc.
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  10. Amisano, Gianni & Giacomini, Raffaella, 2007. "Comparing Density Forecasts via Weighted Likelihood Ratio Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 177-190, April.
  11. Fattouh, Bassam & Kilian, Lutz & Mahadeva, Lavan, 2012. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," CEPR Discussion Papers 8916, C.E.P.R. Discussion Papers.
  12. Lutz Kilian & Clara Vega, 2008. "Do energy prices respond to U.S. macroeconomic news? a test of the hypothesis of predetermined energy prices," International Finance Discussion Papers 957, Board of Governors of the Federal Reserve System (U.S.).
  13. Jan J. J. Groen & Richard Paap & Francesco Ravazzolo, 2013. "Real-Time Inflation Forecasting in a Changing World," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(1), pages 29-44, January.
  14. Christian Kascha & Francesco Ravazzolo, 2008. "Combining inflation density forecasts," Working Paper 2008/22, Norges Bank.
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  16. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
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  27. repec:dgr:uvatin:20120118 is not listed on IDEAS
  28. Hall, Stephen G. & Mitchell, James, 2007. "Combining density forecasts," International Journal of Forecasting, Elsevier, vol. 23(1), pages 1-13.
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