On the Macroeconomic Determinants of Long-Term Volatilities and Correlations in U.S. Stock and Crude Oil Markets

34 Pages Posted: 14 Mar 2012 Last revised: 1 May 2014

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Alfred Weber Institute for Economics; ETH Zürich - KOF Swiss Economic Institute

Karin Loch

Heidelberg University - Faculty of Economics and Social Studies

Daniel Rittler

Heidelberg University - Alfred Weber Institute for Economics

Date Written: March 17, 2014

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 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.

Keywords: Oil-stock relationship, long-term volatility, long-term correlation, GARCH-MIDAS, DCC-MIDAS

JEL Classification: C32, C58, Q43

Suggested Citation

Conrad, Christian and Loch, Karin and Rittler, Daniel, On the Macroeconomic Determinants of Long-Term Volatilities and Correlations in U.S. Stock and Crude Oil Markets (March 17, 2014). Journal of Empirical Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2021199 or http://dx.doi.org/10.2139/ssrn.2021199

Christian Conrad (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany
+49 (06)221 543173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Karin Loch

Heidelberg University - Faculty of Economics and Social Studies ( email )

Bergheimer Str. 58
Heidelberg, D-69115
Germany

Daniel Rittler

Heidelberg University - Alfred Weber Institute for Economics ( email )

Bergheimer Straße 58
Heidelberg, D-69115
Germany
+49 6221 54 2908 (Phone)

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