Download This PaperStock-Oil Comovement: Fundamentals or Financialization?
Fisher College of Business Working Paper No. 2022-03-08
Charles A. Dice Center Working Paper No. 2022-8
60 Pages Posted: 31 Aug 2022 Last revised: 17 Nov 2022
Date Written: November 16, 2022
Abstract
The return correlation between U.S. stocks and oil has shifted from negative to positive since 2008. We use a return decomposition framework to demonstrate that the underlying reason for this structural change is a shift in the correlation between cash flow news for the two assets. Intuitively, as the U.S. turned from an oil importer to a net exporter, the correlation between the cash flow news associated with oil and the U.S. stock market turned positive. 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
JEL Classification: E44, G11, G12, Q43
Suggested Citation: Suggested Citation
Alessandro Melone (Contact Author)
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
