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Structural breaks, dynamic correlations, asymmetric volatility transmission, and hedging strategies for petroleum prices and USD exchange rate

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  • Mensi, Walid
  • Hammoudeh, Shawkat
  • Yoon, Seong-Min

Abstract

This paper investigates the influence of structural changes on the asymmetry of volatility spillovers, asset allocation and portfolio diversification between the USD/euro exchange market and each of six major spot petroleum markets including WTI, Europe Brent, kerosene, gasoline and propane. Using the bivariate DCC–EGARCH model with and without structural change dummies, the results provide evidence of significant asymmetric volatility spillovers between the U.S. dollar exchange rate and the petroleum markets. Moreover, the model with the structural breaks reduces the degree of volatility persistence and leads to more appropriate hedging and asset allocation strategies for all pairs considered. Thus, the findings have important implications for financial risk management.

Suggested Citation

  • Mensi, Walid & Hammoudeh, Shawkat & Yoon, Seong-Min, 2015. "Structural breaks, dynamic correlations, asymmetric volatility transmission, and hedging strategies for petroleum prices and USD exchange rate," Energy Economics, Elsevier, vol. 48(C), pages 46-60.
  • Handle: RePEc:eee:eneeco:v:48:y:2015:i:c:p:46-60
    DOI: 10.1016/j.eneco.2014.12.004
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    6. Ahmed, Walid M.A., 2018. "On the interdependence of natural gas and stock markets under structural breaks," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 149-161.
    7. Mensi, Walid & Hammoudeh, Shawkat & Shahzad, Syed Jawad Hussain & Al-Yahyaee, Khamis Hamed & Shahbaz, Muhammad, 2017. "Oil and foreign exchange market tail dependence and risk spillovers for MENA, emerging and developed countries: VMD decomposition based copulas," Energy Economics, Elsevier, vol. 67(C), pages 476-495.
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    13. Polanco Martínez, Josué M. & Abadie, Luis M. & Fernández-Macho, J., 2018. "A multi-resolution and multivariate analysis of the dynamic relationships between crude oil and petroleum-product prices," Applied Energy, Elsevier, vol. 228(C), pages 1550-1560.
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    15. Fernandez-Diaz, Jose M. & Morley, Bruce, 2019. "Interdependence among agricultural commodity markets, macroeconomic factors, crude oil and commodity index," Research in International Business and Finance, Elsevier, vol. 47(C), pages 174-194.
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    18. Meng, Xiangcai & Huang, Chia-Hsing, 2016. "Nonlinear models for the sources of real effective exchange rate fluctuations: Evidence from the Republic of Korea," Japan and the World Economy, Elsevier, vol. 40(C), pages 21-30.

    More about this item

    Keywords

    Petroleum markets; USD/euro exchange rate; Asymmetric volatility spillovers; Dynamic hedge ratios; Multivariate-DCC–EGARCH; Structural breaks;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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