Conditional dependence structure between oil prices and international stock markets

2019 ◽  
Vol 14 (2) ◽  
pp. 439-467 ◽  
Author(s):  
Wajdi Hamma ◽  
Bassem Salhi ◽  
Ahmed Ghorbel ◽  
Anis Jarboui
Keyword(s):  
Stock Markets ◽  
Oil Prices ◽  
Conditional Variance ◽  
Optimal Portfolio ◽  
Dependence Structure ◽  
Hedging Strategy ◽  
Content Type ◽  
Conditional Dependence ◽  
Hedge Ratios ◽  
Stock Portfolio

Purpose The purpose of this paper is to analyze the optimal hedging strategy of the oil-stock dependence structure. Design/methodology/approach 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. Findings 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. Originality/value 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.

Hedging stock market prices with WTI, Gold, VIX and cryptocurrencies: a comparison between DCC, ADCC and GO-GARCH models

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohamed Fakhfekh ◽  
Ahmed Jeribi ◽  
Ahmed Ghorbel ◽  
Nejib Hachicha
Keyword(s):  
Stock Market ◽  
Stock Markets ◽  
Multivariate Garch ◽  
Garch Models ◽  
Hedging Strategy ◽  
Market Prices ◽  
Content Type ◽  
Hedge Ratios ◽  
Multivariate Garch Models ◽  
Optimal Hedge

PurposeIn a first place, the present paper is designed to examine the dynamic correlations persistent between five cryptocurrencies, WTI, Gold, VIX and four stock markets (SP500, FTSE, NIKKEI and MSCIEM). In a second place, it investigates the relevant optimal hedging strategy.Design/methodology/approachEmpirically, the authors examine how WTI, Gold, VIX and five cryptocurrencies can be applicable to hedge the four stock markets. Three variants of multivariate GARCH models (DCC, ADCC and GO-GARCH) are implemented to estimate dynamic optimal hedge ratios.FindingsThe reached findings prove that both of the Bitcoin and Gold turn out to display remarkable hedging commodity features, while the other assets appear to demonstrate a rather noticeable disposition to act as diversifiers. Moreover, the results show that the VIX turns out to stand as the most effectively appropriate instrument, fit for hedging the stock market indices various related refits. Furthermore, the results prove that the hedging strategy instrument was indifferent for FTSE and NIKKEI stock while for the American and emerging markets, the hedging strategy was reversed from the pre-cryptocurrency crash to the during cryptocurrency crash period.Originality/valueThe first paper's empirical contribution lies in analyzing emerging cross-hedge ratios with financial assets and compare hedging effectiveness within the period of crash and the period before Bitcoin crash as well as the sensitivity of results to refits choose to compare between short term hedging strategy and long-term one.

Religion vs ethics: hedge and safe haven properties of Sukuk and green bonds for stock markets pre- and during COVID-19

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Muhammad Abubakr Naeem ◽  
Mustafa Raza Rabbani ◽  
Sitara Karim ◽  
Syed Mabruk Billah
Keyword(s):  
Stock Markets ◽  
Economic Stress ◽  
Low Risk ◽  
Sufficient Evidence ◽  
Safe Haven ◽  
Socially Responsible ◽  
Content Type ◽  
Hedge Ratios ◽  
Regulatory Bodies ◽  
Investment Portfolios

Purpose This study aims to examine the hedge and safe-haven properties of the Sukuk and green bond for the stock markets pre- and during the COVID-19 pandemic period. Design/methodology/approach To test the hedge and safe-haven characteristics of Sukuk and green bonds for stock markets, the study first uses the methodology proposed by Ratner and Chiu (2013). Next, the authors estimate the hedge ratios and hedge effectiveness of using Sukuk and green bonds in a portfolio with stock markets. Findings Strong safe-haven features of ethical (green) bonds reveal that adding green bonds into the investment portfolios brings considerable diversification avenues for the investors who tend to take fewer risks in periods of economic stress and turbulence. The hedge ratio and hedge effectiveness estimates reveal that green bonds provide sufficient evidence of the hedge effectiveness for various international stocks. Practical implications The study has significant implications for faith-based investors, ethical investors, policymakers and regulatory bodies. Religious investors can invest in Sukuk to relish low-risk and interest-free investments, whereas green investors can satisfy their socially responsible motives by investing in these investment streams. Policymakers can direct the businesses to include these diversifiers for portfolio and risk management. Originality/value The study provides novel insights in the testing hedge and safe-haven attributes of green bonds and Sukuk while using unique methodologies to identify multiple low-risk investors for investors following the uncertain COVID-19 pandemic.

The optimal thermal causal path analysis on the relationship between international crude oil price and stock market

Kybernetes ◽  
2018 ◽  
Vol 47 (6) ◽  
pp. 1242-1261 ◽  
Author(s):  
Can Zhong Yao ◽  
Peng Cheng Kuang ◽  
Ji Nan Lin
Keyword(s):  
Stock Market ◽  
Crude Oil ◽  
Stock Markets ◽  
Oil Prices ◽  
Oil Price ◽  
Chinese Stock Market ◽  
Crude Oil Price ◽  
Content Type ◽  
Crude Oil Prices ◽  
Causal Path

Purpose The purpose of this study is to reveal the lead–lag structure between international crude oil price and stock markets. Design/methodology/approach The methods used for this study are as follows: empirical mode decomposition; shift-window-based Pearson coefficient and thermal causal path method. Findings The fluctuation characteristic of Chinese stock market before 2010 is very similar to international crude oil prices. After 2010, their fluctuation patterns are significantly different from each other. The two stock markets significantly led international crude oil prices, revealing varying lead–lag orders among stock markets. During 2000 and 2004, the stock markets significantly led international crude oil prices but they are less distinct from the lead–lag orders. After 2004, the effects changed so that the leading effect of Shanghai composite index remains no longer significant, and after 2012, S&P index just significantly lagged behind the international crude oil prices. Originality/value China and the US stock markets develop different pattens to handle the crude oil prices fluctuation after finance crisis in 1998.

RETURN AND VOLATILITY SPILLOVER BETWEEN SECTORAL STOCK AND OIL PRICE: EVIDENCE FROM PAKISTAN STOCK EXCHANGE

2017 ◽  
Vol 12 (02) ◽  
pp. 1750007
Author(s):  
MUHAMMAD IRFAN MALIK ◽  
ABDUL RASHID
Keyword(s):  
Stock Returns ◽  
Stock Exchange ◽  
Hedge Fund ◽  
Oil Prices ◽  
Optimal Portfolio ◽  
Oil Price ◽  
Price Transmission ◽  
Volatility Spillover ◽  
Hedge Ratios ◽  
Short Run

This paper aims to investigate the return and volatility spillover between world oil prices and the sectoral stock of Pakistan. We estimate a bivariate VAR(1)-AGARCH (1,1) model using weekly data sampled from January 1, 2001 to December 31, 2015. The model results are used to estimate the optimal portfolio weights and hedge ratios. The empirical findings suggest no short-run price transmission between world oil prices and stock sectors of Pakistan Stock Exchange. Only the past unexpected shocks in world oil prices has significant effect on the volatility of sectoral stock returns of Pakistan Stock Exchange, and no volatility spillover exist between world oil price and stock sectors. The optimal portfolio weights and hedge ratios for oil/stock holdings are sensitive to sectors considered. These findings are of great interest for policy makers, hedge fund managers, [Formula: see text] investors and market participants.

Dual and single hedging strategy: a novel comparison from the direct and cross hedging perspective

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yun Feng ◽  
Yan Cui
Keyword(s):  
Exchange Rates ◽  
Foreign Exchange ◽  
Oil Prices ◽  
Performance Criteria ◽  
Foreign Exchange Rates ◽  
Hedging Strategy ◽  
Content Type ◽  
Advantages And Disadvantages ◽  
Cross Hedging ◽  
The Cross

PurposeThe purpose of this paper is to deeply study and compare the dual and single hedging strategy, from the direct and cross hedging perspective.Design/methodology/approachThe authors not only first consider the dual hedge of integrated risks in this oil prices and foreign exchange rates setting but also make a novel comparison between the dual and single hedging strategy from a direct and cross hedging perspective. In total, six econometric models (to conduct one-step-ahead out-of-sample rolling estimation of the optimal hedge ratio) and two hedging performance criteria are employed in two different hedging backgrounds (direct and cross hedging).FindingsResults show that in the direct hedging background, a dual hedge cannot outperform the single hedge. But in the cross dual hedging setting, a dual hedge performs much better, possibly because the dual hedge brings different levels of advantages and disadvantages in the two different settings and the superiority of the dual hedge is more obvious in the cross dual hedging setting.Originality/valueThe existing literature that deals with oil prices and foreign exchange rates mostly concentrates on their relationship and comovements, while the dual hedge of integrated risks in this setting remains underresearched. Besides, the existing literature that deals with dual hedge gets its conclusions only based on a single specific background (direct or cross hedging) and lacks deeper investigation. In this paper, the authors expand the width and depth of the existing literature. Results and implications are revealing.

Oil and risk premia in equity markets

2020 ◽  
Vol 37 (4) ◽  
pp. 697-723
Author(s):  
Satish Kumar ◽  
Riza Demirer ◽  
Aviral Kumar Tiwari
Keyword(s):  
Stock Market ◽  
Stock Markets ◽  
Systematic Risk ◽  
Oil Prices ◽  
Risk Premia ◽  
Market Size ◽  
Predictive Information ◽  
Content Type ◽  
Oil Market ◽  
Factor Returns

Purpose This study aims to explore the oil–stock market nexus from a novel angle by examining the predictive role of oil prices over the excess returns associated with the market, size, book-to-market and momentum factors via bivariate cross-quantilograms. Design/methodology/approach This study makes use of the bivariate cross-quantilogram methodology recently developed by Han et al. (2016) to analyze the predictability patterns across the oil and stock markets by focusing on various quantiles that formally distinguish between normal, bull and bear as well as extreme market states. Findings The study analysis of systematic risk premia across the four regions shows that crude oil returns indeed capture predictive information regarding excess factor returns in stock markets, particularly those associated with market, size and momentum factors. However, the predictive power of oil return over excess factor returns is asymmetric and primarily concentrated on extreme quantiles, suggesting that large fluctuations in oil prices capture markedly different predictive information over stock market risk premia during up and down states of the oil market. Practical implications The findings have significant implications for the profitability of factor- or style-based active portfolio strategies and suggest that the predictive information contained in oil market fluctuations could be used to enhance returns via conditional strategies based on these predictability patterns. Originality/value This study contributes to the vast literature on the oil–stock market nexus from a novel perspective by exploring the effect of oil price fluctuations on the risk premia associated with the systematic risk factors including market, size, value and momentum.

Has the dependence structure of the BRICS exchange rates changed after the financial crisis? Evidence from R-Vine copula model

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Zhuoqun Zhang ◽  
Tao Zhang
Keyword(s):  
Financial Crisis ◽  
Exchange Rates ◽  
Trade Policy ◽  
Design Methodology ◽  
Policy Design ◽  
Oil Prices ◽  
Dependence Structure ◽  
Copula Model ◽  
Content Type ◽  
Vine Copula

PurposeThe authors examine the dependence structure of the BRICS exchange rates.Design/methodology/approachThe authors construct a regular vine copula model to study the co-movements of exchange rates in BRICS controlling the influences from the SDR currencies and the oil prices.FindingsThe main findings show that, after the financial crisis, RMB pursued a more balanced strategy shifting from USD-centered to USD-EUR dependency and the oil prices become more dependent on RUB than USD, which could weaken the dollar hegemony. From robustness tests, we find that the inclusion of RMB in SDR has certain but limited impacts on the dependence structure and the influence of the GBP weakened as well. The results have important implications for currency trade, policy design and the future of the BRICS.Originality/valueThe contribution of this paper is twofold. First, we examine the interdependence structure of the BRICS exchange rates controlling for the influence of SDR currencies and the oil prices with R-Vine copula model. Second, we compare the pre- and after-crisis structure and see if the financial crisis and the BRICS summits have changed the structure.

Volatility and dependence structures of Latin American stock markets

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Guilherme Cardoso ◽  
Karem Ribeiro ◽  
Luciano Carvalho
Keyword(s):  
Latin America ◽  
Latin American ◽  
Stock Markets ◽  
Dependence Structure ◽  
Subprime Crisis ◽  
Time Varying ◽  
Content Type ◽  
Macroeconomic Effects ◽  
The Relationship ◽  
Dependence Structures

PurposeRisk management has been crucial to investors and regulators for pursuing market diversification opportunities and developing strategies to ensure market stability. This study examines the dependence structures of volatility, related to co-movements and macroeconomic effects, among Latin American stock markets and the risk–return spectrum benefits in the Latin American market using time-varying returns and volatility forecasts within a multivariate structure.Design/methodology/approachThe sample comprised the largest stock markets in Latin America during the period from January 2000 to December 2017 and copulas and multivariate models were applied.FindingsThe results indicated that the copula with the best fit for modeling the dependence structure of the markets was symmetric Joe-Clayton with time-varying parameters. The dependence volatility structure was higher in the positive (upper tail) than in the negative (lower tail) returns, which may indicate that the Latin American markets had diversification benefits during downturns. Evidence of market coupling was found during times of the global crisis (subprime crisis) in Latin America. The presence of monetary and temporal effects over the dependence structures suggests that investors may obtain gains in a multivariate structure with copula distributions.Originality/valueThe findings will be of interest to researchers and practitioners for several reasons. First, this study contributes to the growing literature on the relationship between market dependence and volatility. Second, it indicates that the Latin American markets may present diversification advantages during downturns. Third, it informs the influence of macroeconomic effects on Latin American markets. The models that included the nonnormal and asymmetric characteristics of the financial market yielded better results in terms of less information loss and data adherence.

Crude oil and GCC stock markets

2020 ◽  
Vol 14 (4) ◽  
pp. 745-756 ◽  
Author(s):  
Abdullah Alqahtani ◽  
Amine Lahiani ◽  
Ali Salem
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Stock Markets ◽  
Oil Prices ◽  
Least Square ◽  
Data Series ◽  
Causality Test ◽  
Stock Market Returns ◽  
Content Type ◽  
Gcc Countries

Purpose This paper aims to investigate the transmission of international oil prices to the stock market indices of the Gulf Cooperation Council (GCC) countries over the weekly period from April 07, 2004, to August 15, 2018. Design/methodology/approach The authors use the augmented Dickey–Fuller (ADF) unit root test to check the order of integration of data series. Afterward, the authors use the ordinary least square method to determine the spillover of international oil prices to the stock markets of GCC countries while accounting for the time-varying volatility of oil and stock market returns through the generalized autoregressive conditional heteroskedasticity. Then, the Johansen (1991) cointegration test is used to determine the long-run equilibrium relationship. Finally, the Granger (1969) causality test is used to determine the short-run causal effects between oil and the stock markets returns of GCC countries. Findings The findings indicate that the stock markets of GCC countries are efficient and respond significantly to international oil prices and evidence of high volatility associated with oil returns. Originality/value Investors and portfolio managers should consider the association between international oil prices and GCC stock returns when allocating their funds for diversification strategy. Moreover, policymakers should better understand the behavior of local stock markets.

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