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Addressing COP21 using a stock and oil market integration index

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  • Batten, Jonathan A.
  • Kinateder, Harald
  • Szilagyi, Peter G.
  • Wagner, Niklas F.

Abstract

COP21 implementation should lead to a decline in the future demand for fossil fuels. One key implication for investors is how to manage this risk. We construct a monthly stock and oil market integration index and demonstrate that oil investors can offset adverse oil price risk by holding diversified global stock portfolios. The portfolios are formed from eight different combinations of developed and emerging stock markets. We show that measuring the degree of stock-oil market integration is critical to managing the time-varying degrees of integration. Under normal market conditions markets are segmented and this yields the opportunity for oil investors to diversify energy price risk through the purchase of stocks. The optimal oil-stock diversified portfolio provides risk-adjusted positive benefits to investors, with portfolio weights changing over time as COP21 implementation proceeds.

Suggested Citation

  • Batten, Jonathan A. & Kinateder, Harald & Szilagyi, Peter G. & Wagner, Niklas F., 2018. "Addressing COP21 using a stock and oil market integration index," Energy Policy, Elsevier, vol. 116(C), pages 127-136.
    • Handle: RePEc:eee:enepol:v:116:y:2018:i:c:p:127-136
    DOI: 10.1016/j.enpol.2018.01.048
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    More about this item

    Keywords

    Commodities; COP21; Financial market integration; International asset pricing; Market risk; WTI Oil; Risk of climate change; Systematic risk;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F2 - International Economics - - International Factor Movements and International Business
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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