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

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.

Determinants of time varying co-movements among international stock markets during crisis and non-crisis periods

“…Baele et al (2010) and Colacito et al (2011) apply the MIDAS technique to Engle's (2002) DCC model to decompose the co-movement of stocks and bonds into shortand long-run components. Further, Conrad et al (2014) and Asgharian et al (forthcoming) extend the DCC-MIDAS model by allowing the macro-finance variables to enter the long-run component of the correlations. To the best of our knowledge, the current study is the first to use the DCC MIDAS framework to test the validity of the wake-up call hypothesis.…”

Time-variation between metal commodities and oil, and the impact of oil shocks: GARCH-MIDAS and DCC-MIDAS analyses

“…where 𝑤 1 and 𝑤 2 are the weights and following Conrad et al (2014), by restricting 𝑤 1 = 1, one is left with 𝑤 2 of which its size dictates the speed of decay of the weighing scheme function…”

On the Economic Determinants of Optimal Stock-Bond Portfolios: International Evidence

“…Alternatively, we could employ an asymmetric GARCH model or a GARCH-MIDAS model as, for example, inConrad et al (2014) in the first step. However, as a result the volatility-adjusted residuals would depend on the selection of the best volatility model which might vary across stock/bond markets and, more importantly, across countries.…”