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Coherence, connectedness and dynamic hedging effectiveness between emerging markets equities and commodity index funds

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  • Singh, Jitendra
  • Ahmad, Wasim
  • Mishra, Anil

Abstract

In this paper, we examine the hedging performance of two emerging markets equities indices represented by Morgan Stanley Capital International (MSCI) - Emerging Market (EM) and MSCI-BRIC (Brazil, Russia, India, and China) with the two globally traded commodities indices viz. Standard & Poor's Goldman Sachs Commodity Index (S&P-GSCI, henceforth GSCI) and Bloomberg Commodity Index (BCOM) and two US-linked financial factors viz. the implied volatility index of S&P 500 index (VIX) and the US bond futures. The study uses the daily data for the period 04 January 2004 to 30 November 2017 and adopts three-step procedure. In the first step, we examine the wavelet coherence among these indices followed by connectedness analysis in the second step. In the third step, we estimate the dynamic conditional correlations models to calculate the time-varying hedge ratios and use the rolling-window approach to estimate one-step-ahead forecast of dynamic conditional volatility. The estimated results suggest the existence of a higher level of dynamic coherence and connectedness between equities and commodities benchmarks, implying that the investors do not care much about the composition of these indices. The extent of comovement is almost same in the case of EM and BRIC. However, both equities indices (EM & BRIC) exhibit a negative correlation with VIX and BOND. The results of connectedness and dynamic conditional correlations capture the major turning points. The optimal hedge ratios suggest that the VIX is the most desirable asset for hedging choices followed by BCOM and GSCI. Thus, it can be concluded that the emerging markets equities indices can be combined with commodities indices for hedging and risk diversification purpose.

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  • Singh, Jitendra & Ahmad, Wasim & Mishra, Anil, 2019. "Coherence, connectedness and dynamic hedging effectiveness between emerging markets equities and commodity index funds," Resources Policy, Elsevier, vol. 61(C), pages 441-460.
    • Handle: RePEc:eee:jrpoli:v:61:y:2019:i:c:p:441-460
    DOI: 10.1016/j.resourpol.2018.03.006
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    More about this item

    Keywords

    Implied volatility; Wavelet coherence; Connectedness; Co-movement;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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