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Portfolio Diversification in Energy Markets

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Author Info

  • Galvani, Valentina

    () (University of Alberta, Department of Economics)

  • Plourde, Andre

    () (University of Alberta, Department of Economics)

Abstract

This papers 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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File URL: http://dx.doi.org/10.1016/j.eneco.2009.05.015
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Bibliographic Info

Paper provided by University of Alberta, Department of Economics in its series Working Papers with number 2009-6.

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Length: 23 pages
Date of creation: 31 Jan 2009
Date of revision:
Handle: RePEc:ris:albaec:2009_006

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Keywords: energy markets; diversification benefits; mean-variance spanning;

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References

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  20. Galvani, Valentina & Plourde, Andre, 2009. "Spanning with Zero-Price Investment Assets," Working Papers 2009-5, University of Alberta, Department of Economics.
  21. Roon, F.A. de & Nijman, T.E. & Werker, B.J.M., 1998. "Testing for mean-variance spanning with short sales constraints and transaction costs: The case of emerging markets," Discussion Paper 1998-07, Tilburg University, Center for Economic Research.
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Citations

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Cited by:
  1. Galvani, Valentina & Plourde, Andre, 2009. "Spanning with Zero-Price Investment Assets," Working Papers 2009-5, University of Alberta, Department of Economics.
  2. 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.
  3. Henriques, Irene & Sadorsky, Perry, 2011. "The effect of oil price volatility on strategic investment," Energy Economics, Elsevier, vol. 33(1), pages 79-87, January.
  4. 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.

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