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Frequency spillovers, connectedness, and the hedging effectiveness of oil and gold for US sector ETFs

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  • Kang, Sanghoon
  • Hernandez, Jose Arreola
  • Sadorsky, Perry
  • McIver, Ronald

Abstract

This study uses time-frequency analysis to examine directional connectedness between US sector equity ETFs, oil, gold, stock market, and uncertainty factors over the short and long terms. Frequency-based spillover index and portfolio hedging methods are applied to develop the empirical results. In analysing directional connectedness, we find that the market's 30-day forward looking expectations of US stock market volatility (VIX) has the strongest effect on the US sector equity ETFs in both the short and long runs. This is followed by the 30-day forward looking expectations of oil price volatility (OVX). Of the uncertainty factors, US economic policy uncertainty has the smallest impact on sector ETFs. Oil has a stronger effect on sector ETFs than gold in the short and long runs. Spillovers between the sector ETFs, gold, oil, and uncertainty factors, are asymmetric for both short and long runs, stronger in the short term, and noticeably increase in times of financial turmoil and economic uncertainty. Portfolio hedging results show that oil is the most effective hedge for each sector ETF in both the short term and the long term. The highest hedging effectiveness is observed for the Consumer Staples ETF.

Suggested Citation

  • Kang, Sanghoon & Hernandez, Jose Arreola & Sadorsky, Perry & McIver, Ronald, 2021. "Frequency spillovers, connectedness, and the hedging effectiveness of oil and gold for US sector ETFs," Energy Economics, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:eneeco:v:99:y:2021:i:c:s0140988321001833
    DOI: 10.1016/j.eneco.2021.105278
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    More about this item

    Keywords

    Sector ETFs; Connectedness; Frequency spillovers; Hedging effectiveness; Gold and oil; VIX;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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