Forecasting the dynamic relationship between crude oil and stock prices since the 19th century
JournalJournal of Commodity Markets
AuthorsAbebe Hailemariam, Kris Ivanovski
PublishedDecember 2021
PublisherElsevier
In this paper, we model and forecast the volatility and correlation between oil prices and stock returns. Employing a recently innovated generalized autoregressive score (GAS) model based on the score function and using long historical data spanning from 1871 to 2020, we find a time-varying relationship between oil prices and stock returns. Specifically, the dynamic correlations between crude oil and stock returns tend to rise during turbulent events over the sample period significantly. Our results show that the GAS(1,1) model outperforms the DCC-GARCH model. Our results on the dependent patterns between oil price and stock returns provide useful information for investors, portfolio managers and market participants.
The Bankwest Curtin Economics Centre team acknowledges the Wadjuk Nyungar people as the traditional owners of the land on which the Centre is situated.