A revisit to stock market contagion and portfolio hedging strategies

2017 ◽  
Vol 59 (5) ◽  
pp. 618-635 ◽  
Author(s):  
Amanjot Singh ◽  
Manjit Singh
Keyword(s):  
Equity Markets ◽  
Optimal Portfolio ◽  
Portfolio Risk ◽  
Content Type ◽  
Crisis Period ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
The Us ◽  
Market Contagion ◽  
Optimal Hedge

Purpose This paper aims to attempt to re-capture the stock market contagion effect from the US to the BRIC equity markets during the recent global financial crisis in a multivariate framework. Apart from this, the study also identifies optimal portfolio hedging strategies to minimize the underlying portfolio risk during the period undertaken for the purpose of study. Design/methodology/approach To account for the dynamic interactions, the study uses vector autoregression (p) dynamic conditional correlation (DCC)-asymmetric generalized autoregressive conditional heteroskedastic (1,1) model in a multivariate framework, coupled with a monthly heat map relating to the co-movement between the US and the BRIC equity markets during the period 2007-2009. Finally, by following the studies, Hammoudeh et al. (2010) and Syriopoulos et al. (2015), the time-varying optimal portfolio hedge ratios and weights are computed. Findings The results report a contagion impact of the US subprime crisis (following the collapse of the Lehman Brothers) on the Indian and Russian stock markets only. On the other hand, a higher degree of interdependence between the US and Brazilian market has been observed. The US and Chinese equity markets indicate a relatively lower level of interdependence among themselves. The optimal hedge ratios are found to be most effective for a portfolio comprising the US and Chinese stocks even during the crisis period. A US investor should invest approximately 30 cents in the Indian market and rest of the 70 cents in the US market in a US$1 portfolio to minimize the portfolio risk without lowering the expected returns. During the crisis period (2007-2009), the optimal portfolio weights indicate a higher weightage to the BRIC stocks. Practical implications The results support the construction of optimal US–BRIC stock portfolios and provide an insight to the investors and policy makers both domestic as well as international, with regard to the contagion impact and interdependence, especially during a crisis period. Originality/value The study uses a DCC model in a multivariate framework instead of bivariate, wherein all the markets are factored into a single interaction framework across a very long period (2004-2014). Second, a heat map of monthly correlation combinations has been created for the period 2007-2009, to comprehend the contagion impact or interdependence among the markets. Finally, the study ascertains time-varying optimal hedge ratios and portfolio weights for a two asset portfolio, from a US investor viewpoint, making the study first of its kind in all the perspectives.

Optimal currency hedge and the carry trade

2020 ◽  
Vol 19 (3) ◽  
pp. 411-427
Author(s):  
Fabio Filipozzi ◽  
Kersti Harkmann
Keyword(s):  
Foreign Currency ◽  
Ordinary Least Squares ◽  
Carry Trade ◽  
Portfolio Risk ◽  
Content Type ◽  
Hedging Strategies ◽  
Hedge Ratios ◽  
Sharpe Ratios ◽  
Optimal Hedge ◽  
Weekly Frequency

Purpose This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds. Design/methodology/approach The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach. Findings The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies. Originality/value The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

Cross-market dynamics and optimal portfolio strategies in Latin American equity markets

2015 ◽  
Vol 27 (2) ◽  
pp. 161-181 ◽  
Author(s):  
Mohamed El Hédi Arouri ◽  
Amine Lahiani ◽  
Duc Khuong Nguyen
Keyword(s):  
Latin American ◽  
Portfolio Management ◽  
Equity Markets ◽  
Content Type ◽  
Volatility Transmission ◽  
Volatility Spillovers ◽  
Hedging Strategies ◽  
Latin American Region ◽  
The Us ◽  
American Region

Purpose – This paper aims to investigate the return links and volatility transmission between five major equity markets of the Latin American region and the USA over the period 1993-2012. Design/methodology/approach – The authors employ a multivariate vector autoregressive moving average – generalized autoregressive conditional heteroskedasticity (VAR-GARCH) methodology which allows for cross-market transmissions in both return and volatility. Moreover, we show how the obtained results can be used to design internationally diversified portfolios involving the Latin American assets and to analyze the effectiveness of hedging strategies. Findings – The results point to the existence of substantial cross-market return and volatility spillovers and are thus crucial for international portfolio management in the Latin American region. However, the intensity of shock and volatility cross effects varies across the studied markets. Research limitations/implications – The optimal weights and hedging ratios that we compute from the observed return and volatility spillovers, suggest that adding the Latin American assets helps improve the risk-adjusted return of the internationally diversified portfolios as well as reduce their risk exposure. For policymakers and market authorities, an increase in the level of shock interactions and volatility transmission between the US and Latin American equity markets as well as among these Latin American markets implies that the stability of the financial system in one country can be deeply affected by the disturbances in another country. Originality/value – The authors extend the previous works on Latin American emerging markets by examining the extent of shock and volatility transmission as well as portfolio design and management from the point of view of both the US (global) and Latin American investors.

scholarly journals Fed and ECB: which is informative in determining the DCC between bitcoin and energy commodities?

2020 ◽  
Vol 4 (1) ◽  
pp. 77-102
Author(s):  
Abdelkader Derbali ◽  
Lamia Jamel ◽  
Monia Ben Ltaifa ◽  
Ahmed K. Elnagar ◽  
Ali Lamouchi
Keyword(s):  
Monetary Policy ◽  
Design Methodology ◽  
Commodity Markets ◽  
Portfolio Risk ◽  
Conditional Correlation ◽  
Predictive Capacity ◽  
Federal Funds ◽  
Content Type ◽  
The Us ◽  
Risk Managers

PurposeThis paper provides an important perspective to the predictive capacity of Fed and European Central Bank (ECB) meeting dates and production announcements for the dynamic conditional correlation (DCC) between Bitcoin and energy commodities returns and volatilities during the period from August 11, 2015 to March 31, 2018.Design/methodology/approachTo assess empirically the unanticipated component of the US and ECB monetary policy, the authors pursue the Kuttner's approach and use the federal funds futures and the ECB funds futures to assess the surprise component. The authors use the approach of DCC as introduced by Engle (2002) during the period from August 11, 2015 to March 31, 2018.FindingsThe authors’ results suggest strong significant DCCs between Bitcoin and energy commodity markets if monetary policy surprises are incorporated in variance. These results confirmed the financialization of Bitcoin and commodity energy markets. Finally, the DCC between Bitcoin and energy commodity markets appears to respond considerably more in the case of Fed surprises than ECB surprises.Originality/valueThis study is a crucial topic for policymakers and portfolio risk managers.

Central bank action will drive global equity markets

2015 ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Equity Markets ◽  
Economic Data ◽  
Equity Prices ◽  
Monetary Policies ◽  
Content Type ◽  
Market Sentiment ◽  
The Us ◽  
Us Monetary Policy

Significance This volatility is driven by expectations of further monetary stimulus in response to a slowing economy. Despite persistent concerns about the fallout from the anticipated tightening in US monetary policy and many country-specific risks, such as the standoff between Greece and its creditors, equity market sentiment remains supported by accommodative monetary policies worldwide and expectations of the US monetary policy tightening being gradual. Impacts Market volatility could increase further, as better-than-expected economic data in the euro-area vies with weaker-than-anticipated US data. Decoupling of surging equity prices and weak economic fundamentals threatens the rally's sustainability, increasing scope for volatility. This decoupling is most pronounced in China, where weak economic data prompt buying of equities in anticipation of stimulus measures. The greatest risk in equity markets is uncertainty surrounding US interest rates and their impact on emerging markets.

scholarly journals Transmission Of The Subprime Crisis: Evidence From Industrial And Financial Sectors Of BRIC Countries

2013 ◽  
Vol 29 (5) ◽  
pp. 1469 ◽  
Author(s):  
Jussi Nikkinen ◽  
Kashif Saleem ◽  
Minna Martikainen
Keyword(s):  
Equity Markets ◽  
Industrial Sector ◽  
Multivariate Garch ◽  
Subprime Crisis ◽  
Economic Sectors ◽  
Crisis Period ◽  
Bric Countries ◽  
Industrial Sectors ◽  
Contagion Effects ◽  
The Us

Although, there is an apparent consensus about the contagion effects of the current US subprime crisis. However, the transmission and repercussions of US subprime crisis, as well as the nature of the transformation suffered by different economic sectors between the US and other markets are such empirical questions that have not been dealt with comprehensively, yet. In this paper, by utilizing the multivariate GARCH analysis of Engle and Kroner (1995) for which a BEKK representation is adopted, we examine the transmission of the US subprime crisis across BRIC financial markets. Moreover, to identify the extent of contagion, we also inspect the diffusion of US subprime crisis to BRIC equity markets financial and industrial sectors. We found interesting evidence of volatility spillovers from US financial sector to all the BRIC markets financial sectors both in the full sample and crisis period. Similarly, except Chinese industrial sector, we observe contagion effects from US to Brazilian, Russian and Indian equity markets industrial sectors. Our results exhibit direct linkage for both returns and volatility between the US equity market and the BRIC markets. Equity markets of Russia and India, however, were found hardly hit during the crisis period among the BRIC countries. Finally, we found no support for the decoupling view while investigating the fastest growing emerging markets, the BRIC countries.

SNB move will accentuate bond-equity divergence

2015 ◽  
Keyword(s):  
Euro Area ◽  
Yield Curve ◽  
Equity Markets ◽  
Bond Markets ◽  
Quantitative Easing ◽  
Bond Yields ◽  
Content Type ◽  
Sovereign Bond ◽  
Advanced Economies ◽  
The Us

Significance The move mainly aims to pre-empt the widely anticipated launch of a sovereign quantitative easing (QE) programme by the ECB on January 22. However, it will accentuate divergences between bond and equity markets. Sovereign bond yields for most advanced economies are falling to new lows and are increasingly negative at the shorter end of the yield curve, because of deflation fears and lacklustre growth outlooks. Yet equity markets are hovering near record highs, buoyed by the US recovery and expectations of further monetary stimulus in the euro-area. Impacts Bond markets will be driven by deflation fears, while equity markets, especially US stocks, will be buoyed by Goldilocks-type conditions. Market expectations that the ECB will launch a sovereign QE programme will make bond yields fall further. Bond yields will be suppressed by investor scepticism about the ECB's ability to reflate the euro-area economy.

Blockchain adoption will grow amid bitcoin volatility

2018 ◽  
Keyword(s):  
Financial Market ◽  
Hedge Funds ◽  
Stock Exchange ◽  
Equity Markets ◽  
Market Volatility ◽  
Seminal Paper ◽  
Content Type ◽  
The Us ◽  
Market Capitalisation ◽  
Swiss Stock Exchange

Subject Crypto market dynamics. Significance The market capitalisation of cryptocurrencies fell to below 250 billion dollars on April 6 from a record high of 827 billion on January 7. Greater regulation, coupled with more volatile global equity markets and the April 15 US tax filing deadline had prompted substantial cryptocurrency selling. However, the valuation has since recovered to more than 325 billion dollars, supported by the US deadline passing, a seminal paper on April 10 by Blossom Finance declaring bitcoin investment allowable under Sharia law and, most importantly, interest in uses for blockchain continuing to grow. Impacts Many crypto hedge funds have shut, many ICOs have failed and this will continue, but among the blockchain firms there will be big successes. The Swiss stock exchange plans to launch a cryptocurrency version of the Swiss franc; Switzerland will expand as an ICO hub. The rise in financial market volatility since February will intensify and persist as global trade tensions are increasing.

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.

Portfolio diversification during monetary loosening policy

2015 ◽  
Vol 16 (2) ◽  
pp. 197-214
Author(s):  
Kamil Makiel
Keyword(s):  
Financial Stability ◽  
Mining Industry ◽  
Portfolio Risk ◽  
New Approach ◽  
Content Type ◽  
Market Portfolio ◽  
The Us ◽  
The Usa ◽  
The Impact ◽  
A Company

Purpose – The purpose of the paper is to analyze the impact of quantitative easing (QE) performed in the USA on relationship between assets mainly from mining and oil industries. Based on the empirical results, the method of diversified portfolio creation has been proposed. Design/methodology/approach – Nine DCC-GARCH-type models have been estimated for each group centered around a main asset: a company from the oil or mining industry, the appropriate currency pair for its market of origin, commodities which could be used for the diversification of risk involved in investing in a portfolio containing the company, and the largest company from the same industry listed on the US market. Each series of conditional correlations was analyzed with regard to the changes that occurred during the various stages of QE. Findings – The correlations are shown to be stabilizing in the successive stages of QE. The most significant changes in the distribution of correlations can be observed after the first stage of QE. The effects of QE are evident not only in the USA but also in other countries; however, the level of its influence varies between different markets and assets. It is possible to diversify the inflation, currency and market portfolio risk by appropriately chosen asset decomposition. Research limitations/implications – The DCC model is limited, so to provide more precise results, more sophisticated models can be estimated and compared. Practical implications – The paper investigate the fact of stabilization in financial markets relations. The findings may prove the validity of continuation of QE. A portfolio creation method has been proposed – it has been stated that including commodity in portfolio is more appropriate then only-bond–equity mix. Originality/value – The new approach of analyzing financial stability has been proposed – the control for stability of conditional correlation.

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