Stock-Oil Comovement: Fundamentals or Financialization?

49 Pages Posted: 15 Oct 2020

See all articles by Alessandro Melone

Alessandro Melone

Vienna Graduate School of Finance (VGSF)

Otto Randl

WU Vienna University of Economics and Business

Leopold Sögner

Institute for Advanced Studies (IHS); Vienna Graduate School of Finance (VGSF)

Josef Zechner

Vienna University of Economics and Business

Date Written: August 27, 2020

Abstract

We investigate the sources of time-variation in the stock-oil correlation over the period 1986-2018. We first derive an oil futures return news decomposition following Campbell and Shiller (1988) and Campbell (1991). Then, for both stock and oil, we split unexpected returns into cash-flow news (which can be related to asset fundamentals because of its link to production) and discount-rate news (which can be driven by shocks to investors holding both assets) using a vector autoregressive (VAR) model. We find that about 75% of the time-varying correlation is related to the comovement of cash-flow news between the two assets. This result is robust to different specifications of the VAR model used to decompose returns. We provide supportive evidence that underlying changes in the structure of the real economy, such as the increased oil production in the U.S., are key drivers for the changing stock-oil comovement beyond the financialization of commodity market.

Keywords: Asset Return Comovements, Oil Futures, VAR Return Decomposition

JEL Classification: G12, Q43, E2

Suggested Citation

Melone, Alessandro and Randl, Otto and Sögner, Leopold and Zechner, Josef, Stock-Oil Comovement: Fundamentals or Financialization? (August 27, 2020). Available at SSRN: https://ssrn.com/abstract=3668239 or http://dx.doi.org/10.2139/ssrn.3668239

Alessandro Melone (Contact Author)

Vienna Graduate School of Finance (VGSF) ( email )

WU Vienna
Welthandelsplatz 1
Vienna, 1020
Austria

HOME PAGE: http://https://sites.google.com/view/alessandro-melone/home

Otto Randl

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, 1020
Austria
+ 43 1 313 36 - 5076 (Phone)

Leopold Sögner

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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