Oil Price Density Forecasts: Exploring the Linkages with Stock Markets

31 Pages Posted: 25 May 2013

See all articles by Marco J. Lombardi

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Francesco Ravazzolo

Free University of Bolzano

Date Written: December 5, 2012

Abstract

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.

Keywords: Oil price, stock price, density forecasting, correlation, Bayesian DCC

JEL Classification: C11, C15, C53, E17, G17

Suggested Citation

Lombardi, Marco Jacopo and Ravazzolo, Francesco, Oil Price Density Forecasts: Exploring the Linkages with Stock Markets (December 5, 2012). Norges Bank Working Paper 2012-24. Available at SSRN: https://ssrn.com/abstract=2269233 or http://dx.doi.org/10.2139/ssrn.2269233

Marco Jacopo Lombardi (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

Francesco Ravazzolo

Free University of Bolzano ( email )

Bolzano
Italy

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