Stock-Oil Comovement: Cash Flows or Discount Rates?

The return correlation between U.S. stocks and oil has shifted from negative to positive since 2008. We use a return decomposition framework to show that an underlying reason for this structural change is a shift in the correlation between cash flow news for both assets. The U.S. oil production is a key driver of both the stock-oil correlation and the cash flow news correlation. Post-2008, positive oil demand shocks are good news for the cash flows of both assets. Our findings help to understand the set of potential determinants of equity-commodity correlations and the diversification benefits of investing in commodities.

Keywords: Equity-Commodity Correlation, Oil Futures, Return Decomposition, Cash Flow News, Oil Production

JEL Classification: E44, G11, G12, Q43

Suggested Citation: Suggested Citation

Melone, Alessandro and Randl, Otto and Sögner, Leopold and Zechner, Josef, Stock-Oil Comovement: Cash Flows or Discount Rates? (November 16, 2022). Fisher College of Business Working Paper No. 2022-03-08, Charles A. Dice Center Working Paper No. 2022-8, Available at SSRN: https://ssrn.com/abstract=4205724 or http://dx.doi.org/10.2139/ssrn.4205724