Abstract
We investigate the sources of time-variation in the stock-oil correlation over the period 1983-2019. We first derive a novel oil futures return news decomposition following Campbell and Shiller (1988) and Campbell (1991). Then, for both stock and oil, we split unexpected returns into cash flow news (which can be related to asset-specific fundamentals) and discount rate news (which can be driven by shocks to investors holding both assets) using a vector autoregressive (VAR) model. We find that about 79% of the time-varying correlation is related to the comovement of cash flow news between the two assets. This result is robust to different specifications of the VAR model used to decompose returns. We provide supportive evidence that underlying changes in the structure of the real economy, such as the increased oil production in the U.S., are key drivers for the changing stock-oil comovement beyond the financialization of commodities.
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