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Journal ArticleDOI

Conditional dependence structure between oil prices and international stock markets: Implication for portfolio management and hedging effectiveness

31 Jul 2019-International Journal of Energy Sector Management (Emerald Publishing Limited)-Vol. 14, Iss: 2, pp 439-467
TL;DR: In this article, the authors analyzed the optimal hedging strategy of the oil-stock dependence structure and found that the Gumbel copula is the best model for modeling the conditional dependence structure of oil and stock markets in most cases.
Abstract: The purpose of this paper is to analyze the optimal hedging strategy of the oil-stock dependence structure.,The methodology consists to model the data over the daily period spanning from January 02, 2002 to May 19, 2016 by a various copula functions to better modeling the dependence between crude oil market and stock markets, and to use dependence coefficients and conditional variance to calculate optimal portfolio weights and optimal hedge ratios, and to suggest the best hedging strategy for oil-stock portfolio.,The findings show that the Gumbel copula is the best model for modeling the conditional dependence structure of the oil and stock markets in most cases. They also indicate that the best hedging strategy for oil price by stock market varies considerably over time, but this variation depends on both the index introduced and the model used. However, the conditional copula method with skewed student more effective than the other models to minimize the risk of oil-stock portfolio.,This research implication can be valuable for portfolio managers and individual investors who seek to make earnings by diversifying their portfolios. The findings of this study provide evidence of the importance of stock assets for making an optimal portfolio consisting of oil in the case of investments in oil and stock markets. This paper attempts to fill the voids in the literature on volatility among oil prices and stock markets in two important areas. First, it uses copulas to investigate the conditional dependence structure of the oil crude and stock markets in the oil exporting and importing countries. Second, it uses the dependence coefficients and conditional variance to calculate dynamic hedge ratios and risk-minimizing optimal portfolio weights for oil–stock.
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Journal ArticleDOI
01 Jan 2020
TL;DR: In this article, the impact of return spillovers and dynamic time-frequency linkages between crude oil prices and five developed stock markets in Europe (the United Kingdom, Spain, Italy, German, and France) in the pre and during Covid-19 outbreak periods was investigated.
Abstract: In this study, we employ both the spillover index of Diebold and Yilmaz [1], and the wavelet coherence approaches to investigate the impacts of return spillovers and dynamic timefrequency linkages between crude oil prices and five developed stock markets in Europe (the United Kingdom, Spain, Italy, German, and France) in the pre and during Covid-19 outbreak periods. The results highlight that IBEX and CAC series are net recipients of risks, while the other assets are a net transmitter of shocks in the pre-Covid-19 period. In contrast to the results for the pre-Covid-19 period, LSE, CAC, and IBEX are the net recipients of return spillovers, reaching a maximum level of about 23% during the Covid-19 outbreak. Specifically, in comparison with the pre-Covid-19 period, the return transmission is more apparent during the Covid-19 crisis. More importantly, there exist significant dependent patterns about the information spillovers, and time-frequency linkages between crude oil and five major stock markets might provide urgent prominent implications for portfolio managers, investors, and government agencies.

15 citations

Journal ArticleDOI
TL;DR: In this article, the authors examined the hedging of Islamic and conventional stock markets risks using diverse financial assets (namely gold, crude oil, VISTOXX, VIX, CDSEU and DJCOM).
Abstract: This study examines the hedging of Islamic and conventional stock markets risks using diverse financial assets (namely gold, crude oil, VISTOXX, VIX, CDSEU and DJCOM). We apply DCC, ADCC and FDCC models to account for heavy tails and asymmetric returns. We use rolling window analysis to construct out-of-sample one-step-ahead forecasts of dynamic conditional correlations and optimal hedge ratios. The findings indicate that the hedge ratios vary and depend upon the inclusion of hedging assets, portfolio composition and model used. The VISTOXX is the best asset to hedge Islamic and conventional stock portfolios. Moreover, the DCC model often leads to diversification benefits and hedging effectiveness better than the others models.

7 citations

Journal ArticleDOI
TL;DR: In this paper, the authors examined the cross hedging effectiveness between UK FTSE100 and world stock index futures from developed and emerging markets: the US, Australia, Brazil, Japan, Hong Kong, Korea and Malaysia.

7 citations

Journal ArticleDOI
TL;DR: In this paper, the authors examined the time-varying optimal hedging ratios for the Dow Jones Islamic and conventional emerging stock market indices, hedged with oil, gold, and the VSTOXX as well as four emerging-country sectoral CDS indices (raw materials, industry, health care, and telecommunications).

4 citations

Journal ArticleDOI
TL;DR: In this article, the authors examined the volatility spillover effects between oil and stock returns in the emerging seven economies (Brazil, China, India, Indonesia, Mexico, Russia and Turkey) using the Granger causality test and vector autoregression-generalized autoregressive conditional heteroskedasticity approach.
Abstract: Purpose This study aims to examine the volatility spillover effects between oil and stock returns in the emerging seven economies. Design/methodology/approach In this study, the Granger causality test and vector autoregression-generalized autoregressive conditional heteroskedasticity approach to analyze the volatility spillover from 1995 to 2019 were used. The findings provide evidence of significant volatility spillover between oil and Brazil, China, India, Indonesia, Mexico, Russia and Turkey (E7) stock markets. Findings All emerging seven stock markets exhibit positive and low constant conditional correlations with oil assets. The magnitude of the correlation changes in respond to the country’s net position in the crude oil market. While a relatively high level of correlation exists between oil and the stock markets of net oil-exporting countries, a relatively low level of correlation exists between oil and the stock markets of net oil-importing countries. Originality/value The findings suggest that oil asset improves the risk-adjusted performance of a well-diversified portfolio of stocks. However, investors should invest a larger portion of their portfolios in E7 stock markets than in oil.

3 citations

References
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Journal ArticleDOI
TL;DR: In this paper, a natural generalization of the ARCH (Autoregressive Conditional Heteroskedastic) process introduced in 1982 to allow for past conditional variances in the current conditional variance equation is proposed.

17,555 citations

Journal ArticleDOI
TL;DR: In this article, a new class of multivariate models called dynamic conditional correlation models is proposed, which have the flexibility of univariate generalized autoregressive conditional heteroskedasticity (GARCH) models coupled with parsimonious parametric models for the correlations.
Abstract: Time varying correlations are often estimated with multivariate generalized autoregressive conditional heteroskedasticity (GARCH) models that are linear in squares and cross products of the data. A new class of multivariate models called dynamic conditional correlation models is proposed. These have the flexibility of univariate GARCH models coupled with parsimonious parametric models for the correlations. They are not linear but can often be estimated very simply with univariate or two-step methods based on the likelihood function. It is shown that they perform well in a variety of situations and provide sensible empirical results.

5,695 citations

Journal ArticleDOI
TL;DR: In this article, a simple time series model designed to capture the dependence of speculative price changes and rates of return data was presented, which is an extension of the autoregressive conditional heteroskedastic (ARCH) and generalized ARCH (GARCH) models obtained by allowing for conditionally t-distributed errors.
Abstract: The distribution of speculative price changes and rates of return data tend to be uncorrelated over time but characterized by volatile and tranquil periods. A simple time series model designed to capture this dependence is presented. The model is an extension of the Autoregressive Conditional Heteroskedastic (ARCH) and Generalized ARCH (GARCH) models obtained by allowing for conditionally t-distributed errors. The model can be derived as a simple subordinate stochastic process by including an additive unobservable rror term in the conditional variance equation. The descriptive validity of the model is illustrated for a set of foreign exchange rates and stock price indices.

2,714 citations

Journal ArticleDOI
TL;DR: In this article, F.R. Engle's autoregressive conditional heteroskedastic model is extended to permit parametric specifications for conditional dependence beyond the mean and variance.
Abstract: R. F. Engle's autoregressive conditional heteroskedastic model is extended to permit parametric specifications for conditional dependence beyond the mean and variance. The suggestion is to model the conditional density with a small number of parameters, and then model these parameters as functions of the conditioning information. This method is applied to two data sets. The first application is to the monthly excess holding yield on U.S. Treasury securities, where the conditional density used is a Student's t distribution. The second application is to the U.S. Dollar/Swiss Franc exchange rate, using a new skewed Student t conditional distribution. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

1,571 citations

Journal ArticleDOI
TL;DR: In this paper, the authors test whether the reaction of international stock markets to oil shocks can be justified by current and future changes in real cash flows and/or changes in expected returns.
Abstract: We test whether the reaction of international stock markets to oil shocks can be justified by current and future changes in real cash flows and/or changes in expected returns. We find that in the postwar period, the reaction of United States and Canadian stock prices to oil shocks can be completely accounted for by the impact of these shocks on real cash flows alone. In contrast, in both the United Kingdom and Japan, innovations in oil prices appear to cause larger changes in stock prices than can be justified by subsequent changes in real cash flows or by changing expected returns.

1,570 citations