Stock-Oil Comovement: Cash Flows or Discount Rates?

Fisher College of Business Working Paper No. 2022-03-08

Charles A. Dice Center Working Paper No. 2022-8

62 Pages Posted: 31 Aug 2022 Last revised: 18 Jan 2024

See all articles by Alessandro Melone

Alessandro Melone

Ohio State University (OSU) - Fisher College of Business

Otto Randl

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: 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 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

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

Alessandro Melone (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Otto Randl

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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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