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Oil price risk exposure of BRIC stock markets and hedging effectiveness

Author

Listed:
  • Syed Jawad Hussain Shahzad

    (University of Montpellier, Montpellier Research in Management
    South Ural State University)

  • Elie Bouri

    (Lebanese American University)

  • Mobeen Ur Rehman

    (South Ural State University)

  • Muhammad Abubakr Naeem

    (University College Dublin)

  • Tareq Saeed

    (King Abdulaziz University)

Abstract

We study the tail dependence between crude oil and BRIC stock markets using a time-varying optimal copula (TVOC) approach. We show evidence of multiple tail dependence regimes, suggesting that simple static or dynamic copula specifications do not fully characterize the extreme dependence between oil and BRIC stock markets. The identified combinations of asymmetric and extreme positive lower tail dependence justify the application of the TVOC. Interestingly, the positive lower tail dependence between oil and stock markets and risk spillover from oil is higher for Brazil and Russia (oil exporters) than India and China (oil importers). Finally, we assess the effectiveness of hedging and measure the conditional diversification benefits of investing in oil for BRIC stock indices. Notably, the Chinese and Indian equity markets offer higher conditional diversification benefits when combined with oil in an equally weighted portfolio.

Suggested Citation

  • Syed Jawad Hussain Shahzad & Elie Bouri & Mobeen Ur Rehman & Muhammad Abubakr Naeem & Tareq Saeed, 2022. "Oil price risk exposure of BRIC stock markets and hedging effectiveness," Annals of Operations Research, Springer, vol. 313(1), pages 145-170, June.
    • Handle: RePEc:spr:annopr:v:313:y:2022:i:1:d:10.1007_s10479-021-04078-0
    DOI: 10.1007/s10479-021-04078-0
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    3. Younis, Ijaz & Shah, Waheed Ullah & Hkiri, Besma & Qureshi, Fiza & Longsheng, Cheng, 2023. "Risk co-movements and portfolio strategies between energy, gold and BRICS markets," Resources Policy, Elsevier, vol. 82(C).

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    More about this item

    Keywords

    Crude oil; BRIC; Time-varying optimal copula; Hedging; Diversification;
    All these keywords.

    JEL classification:

    • 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
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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