Time-frequency analysis of crude oil and S&P500 futures contracts

Joseph McCarthy and Alexei Orlov

Quantitative Finance, 2012, vol. 12, issue 12, 1893-1908

Abstract: We use frequency-domain techniques, namely wavelets and cross-spectra, to examine the association between the daily prices of crude oil futures and daily S&P500 futures closing prices over the past several decades. We investigate contemporaneous and lag--lead relationships in levels and returns. It is our belief that the wavelet and cross-spectral analyses employed in this paper offer insights regarding the relationship between oil prices and stock returns that are not apparent from a conventional time-domain framework. Our findings cast doubt on the purported negative relationship between oil and the U.S. stock market. Our analysis suggests that oil prices lead oil volume, and S&P500 trading volume leads S&P500 prices.

Date: 2012
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DOI: 10.1080/14697688.2012.686669

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