Is Oil A Financial Asset? An Empirical Investigation Spanning the Last Fifteen Years
The 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.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +39 055 2759582
Web page: http://www.disei.unifi.it/
More information through EDIRC
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.:
- Warren Dean & Robert Faff, 2011. "Feedback trading and the behavioural ICAPM: multivariate evidence across international equity and bond markets," Applied Financial Economics, Taylor & Francis Journals, vol. 21(22), pages 1665-1678.
- Shaun K. Roache, 2008. "Commodities and the Market Price of Risk," IMF Working Papers 08/221, International Monetary Fund.
- David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990.
"Speculative Dynamics and the Role of Feedback Traders,"
NBER Working Papers
3243, National Bureau of Economic Research, Inc.
- 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.
- Nikolaos Milonas & Thomas Henker, 2001. "Price spread and convenience yield behaviour in the international oil market," Applied Financial Economics, Taylor & Francis Journals, vol. 11(1), pages 23-36.
- Gregory Koutmos & Reza Saidi, 2001. "Positive feedback trading in emerging capital markets," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 291-297.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Ramaprasad Bhar & Biljana Nikolova, 2009. "Oil Prices and Equity Returns in the BRIC Countries," The World Economy, Wiley Blackwell, vol. 32(7), pages 1036-1054, 07.
- 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.
- 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.
- Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Cowles Foundation Discussion Papers 719R, Cowles Foundation for Research in Economics, Yale University.
- 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.
- Sadorsky, Perry, 1999. "Oil price shocks and stock market activity," Energy Economics, Elsevier, vol. 21(5), pages 449-469, October.
When requesting a correction, please mention this item's handle: RePEc:frz:wpaper:wp2009_12.rdf. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giorgio Ricchiuti)
If references are entirely missing, you can add them using this form.