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Portfolio diversification in energy markets

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  • Galvani, Valentina
  • Plourde, André

Abstract

This paper's results indicate that futures for crude oil, natural gas and unleaded gasoline fail to enhance the performance of representative energy stocks in terms of return to risk, but do decrease the overall level of risk exposure borne by passive equity investors. Our findings suggest that futures contracts on energy commodities are valuable to market participants with an interest in hedging against price fluctuations in energy markets by buy-and-hold strategies. However, this conclusion is reversed when one takes the perspective of traders whose core interests can be better approximated through the return to risk-bearing. In fact, this paper documents that return-to-risk maximizing agents are unlikely to profit from trading energy futures in addition to energy stocks. Moreover, futures for energy commodities fail to offer significant diversification gains with respect to energy stocks once investors adopt simple dynamic trading strategies that rely on readily available pricing information.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 32 (2010)
Issue (Month): 2 (March)
Pages: 257-268

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Handle: RePEc:eee:eneeco:v:32:y:2010:i:2:p:257-268

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Portfolio diversification Energy markets Mean-variance spanning;

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References

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Citations

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Cited by:
  1. Daskalaki, Charoula & Skiadopoulos, George, 2011. "Should investors include commodities in their portfolios after all? New evidence," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2606-2626, October.
  2. Ugur Ergun & Azizah Ibrahim, 2013. "Global Energy Prices and the Behavior of Energy Stock Price Fluctuations," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(11), pages 1460-1465, November.
  3. de Oliveira, Francisco Alexandre & de Paiva, Anderson Paulo & Lima, José Wanderley Marangon & Balestrassi, Pedro Paulo & Mendes, Ronã Rinston Amaury, 2011. "Portfolio optimization using Mixture Design of Experiments: Scheduling trades within electricity markets," Energy Economics, Elsevier, vol. 33(1), pages 24-32, January.
  4. Gustavo A. Marrero & Luis A. Puch & Francisco J. Ramos-Real, 2013. "Mean-variance portfolio methods for energy policy risk management," Documentos del Instituto Complutense de Análisis Económico 2013-41, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  5. Belousova, Julia & Dorfleitner, Gregor, 2012. "On the diversification benefits of commodities from the perspective of euro investors," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2455-2472.
  6. Galvani, Valentina & Plourde, André, 2013. "Spanning with futures contracts," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 61-72.
  7. Galvani, Valentina & Plourde, Andre, 2009. "Spanning with Zero-Price Investment Assets," Working Papers 2009-5, University of Alberta, Department of Economics.
  8. Henriques, Irene & Sadorsky, Perry, 2011. "The effect of oil price volatility on strategic investment," Energy Economics, Elsevier, vol. 33(1), pages 79-87, January.

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