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Forecasting the dynamic relationship between crude oil and stock prices since the 19th century

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  • Ivanovski, Kris
  • Hailemariam, Abebe

Abstract

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.

Suggested Citation

  • Ivanovski, Kris & Hailemariam, Abebe, 2021. "Forecasting the dynamic relationship between crude oil and stock prices since the 19th century," Journal of Commodity Markets, Elsevier, vol. 24(C).
    • Handle: RePEc:eee:jocoma:v:24:y:2021:i:c:s2405851321000039
    DOI: 10.1016/j.jcomm.2021.100169
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    More about this item

    Keywords

    Forecasting; Oil price; Stock price; Volatility and correlation; Multivariate GAS model; DCC-GARCH model;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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