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On the Macroeconomic Determinants of the Long-Term Oil-Stock Correlation

Conrad, Christian and Loch, Karin and Rittler, Daniel

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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 which contain information on current and future economic activity are helpful predictors for changes in the oil-stock correlation. For the period 1993-2011 there is strong evidence for a 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. Our results strongly suggest that crude oil prices cannot be viewed as being exogenous with respect to the U.S. macroeconomy and explain the controversial results concerning the oil-stock relationship in previous studies.

Item Type: Working paper
Date Deposited: 14. Mar 2012 14:55
Date: 2012
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: Oil-stock relationship , long-term volatility , long-term correlation , GARCH-MIDAS , DCC-MIDAS
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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