City Research Online

Asset Correlations and Macroeconomic Fundamentals

Marchese, M. ORCID: 0000-0001-6801-911X, Kyriakou, I. ORCID: 0000-0001-9592-596X, Di Iorio, F. & Tamvakis, M. ORCID: 0000-0002-5056-0159 (2023). Asset Correlations and Macroeconomic Fundamentals. Commodity Insights Digest, 1(2),


The margin between the price of crude oil and one or more of its refined products, known as the crack spread, is a key risk measure in the energy trading industry. Effective forecasts of crack spread returns require modelling the co-movements of crude oil and refined product prices. To this end, in this paper we re-examine the relationship between parameter instability in energy commodity returns correlations and macroeconomic fundamentals using a new correlation component model dubbed the Regime Switching DCC-MIDAS, which distinguishes regime switches in the short and long-run correlations. Breaks in the secular component are associated with low-frequency macroeconomic fundamentals, while short-run correlations are characterized by abrupt breaks linked to market constraints. Our results reveal the benefits of our specification for Value-at-Risk and portfolio optimization in terms of forecasting performance at medium and long horizons and in times of intense market instability, such as the recent pandemic crisis.

Publication Type: Article
Additional Information: © 2023 Bayes Business School – City, University of London (U.K.)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Departments: School of Policy & Global Affairs > Economics
Bayes Business School > Finance
[thumbnail of CID Winter 2023 Marchese et al.pdf]
Text - Published Version
Download (2MB) | Preview


Add to AnyAdd to TwitterAdd to FacebookAdd to LinkedinAdd to PinterestAdd to Email


Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login