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

Wajdi Hamma (University of Sfax, Sfax, Tunisia)
Bassem Salhi (Department of Accounting, College of Business Administration, Majmaah University, Al Majma’ah, Saudi Arabia)
Ahmed Ghorbel (University of Sfax, Sfax, Tunisia)
Anis Jarboui (University of Sfax, Sfax, Tunisia)

International Journal of Energy Sector Management

ISSN: 1750-6220

Article publication date: 13 August 2019

Issue publication date: 11 February 2020

Abstract

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.

Keywords

Citation

Hamma, W., Salhi, B., Ghorbel, A. and Jarboui, A. (2020), "Conditional dependence structure between oil prices and international stock markets: Implication for portfolio management and hedging effectiveness", International Journal of Energy Sector Management, Vol. 14 No. 2, pp. 439-467. https://doi.org/10.1108/IJESM-04-2019-0010

Publisher

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Emerald Publishing Limited

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