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Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables

Salisu, Afees A.; Swaray, Raymond; Oloko, Tirimisiyu F.

Authors

Afees A. Salisu

Dr Raymond Swaray R.Swaray@hull.ac.uk
Senior Lecturer (Associate Professor) in Economics

Tirimisiyu F. Oloko

Abstract

In this study, we revisit the oil–stock nexus by accounting for the role of macroeconomic variables and testing their in-sample and out-of-sample predictive powers. We follow the approaches of Lewellen (2004) and Westerlund and Narayan (2015), which were formulated into a linear multi-predictive form by Makin et al. (2014) and Salisu et al. (2018) and a nonlinear multi-predictive model by Salisu and Isah (2018). Thereafter, we extend the multi-predictive model to account for structural breaks and asymmetries. Our analyses are conducted on aggregate and sectoral stock price indexes for the US stock market. Our proposed predictive model, which accounts for macroeconomic variables, outperforms the oil-based single-factor variant in forecasting aggregate and sectoral US stocks for both in-sample and out-of-sample forecasts. We find that it is important to account for structural breaks in our proposed predictive model, although asymmetries do not seem to improve predictability. In addition, we show that it is important to pre-test the predictors for persistence, endogeneity, and conditional heteroscedasticity, particularly when modeling with high-frequency series. Our results are robust to different forecast measures and forecast horizons.

Journal Article Type Article
Publication Date 2019-01
Print ISSN 0264-9993
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 76
Pages 153-171
Institution Citation Salisu, A. A., Swaray, R., & Oloko, T. F. (2019). Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables. Economic modelling, 76, 153-171. https://doi.org/10.1016/j.econmod.2018.07.029
DOI https://doi.org/10.1016/j.econmod.2018.07.029
Keywords Oil price; Sectoral US stock; Inflation; Output; Interest rate; Forecast evaluation
Publisher URL https://www.sciencedirect.com/science/article/pii/S0264999317319454?via%3Dihub
Copyright Statement © 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

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This file is under embargo until Feb 1, 2020 due to copyright reasons.

Contact R.Swaray@hull.ac.uk to request a copy for personal use.



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