Correlations between oil and stock markets : a wavelet-based approach

In a global economy, shocks occurring in one market can spill over to other markets. This paper investigates the impact of oil shocks and stock markets crashes on correlations between stock and oil markets. We test changes in correlations at different scales with non-overlapping confidence intervals based on estimated wavelet correlations. Contrary to other approaches, this method does not need adjustment for heteroskedasticity biases on the correlation coefficients. Our results show that oil shocks affect the correlation between both markets. The evidence on the change of correlation between stock markets after an oil shock is weaker; except in some specific cases during the Kuwait war and the OPEC cutback period. Conversely, we only find weak evidence that stock market crashes change the correlation between oil and stock markets. Overall, the evidence gives support to including oil as an asset class in asset allocation strategies.he authors acknowledge financial support from Financial Research Center–UNIDE and from the Spanish Ministry of Education and Science, research projects MTM2010-17323, ECO2011-25706, ECO2012-32401 and MTM2012-36163-C06-03