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Oil-stock volatility transmission, portfolio selection and hedging

Author

Listed:
  • Mohamed El Hédi Arouri

    (EDHEC Business School, France)

  • Amine Lahiani

    (LEO-University of Orléans & ESC Rennes School of Business, France)

  • Duc Khuong Nguyen

    (ISC Paris School of Management, France)

Abstract

We employ a bivariate VAR-GARCH model of Ling and McAleer (2003) to examine the volatility transmission between oil prices and stock market sectors in the United States. We also compute the optimal weights and hedge ratios for oil-stock portfolio holdings and show how they can be used to build effective diversification and hedging strategy. Using daily data over the period from January 2, 1995 to December 17, 2010, we find evidence of significant volatility spillovers in both directions, from oil market to stock sectors and from stock sectors to oil market. Moreover, investors can improve the risk-adjusted performance of their portfolios of sector stocks by adding the oil asset. These results are crucial for portfolio management in the presence of the oil risk and the implementation of sector-specific policy actions.

Suggested Citation

  • Mohamed El Hédi Arouri & Amine Lahiani & Duc Khuong Nguyen, 2012. "Oil-stock volatility transmission, portfolio selection and hedging," Economics Bulletin, AccessEcon, vol. 32(4), pages 2768-2778.
    • Handle: RePEc:ebl:ecbull:eb-12-00242
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    oil prices; US stock sectors; portfolio designs; hedge ratios; VAR-GARCH models;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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