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Instabilities in the relationships and hedging strategies between crude oil and US stock markets: Do long memory and asymmetry matter?

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  • Chkili, Walid
  • Aloui, Chaker
  • Nguyen, Duc Khuong

Abstract

This article uses the DCC–FIAPARCH model to examine the time-varying properties of conditional return and volatility of crude oil and US stock markets as well as their dynamic correlations over the period 1988–2013. Our results indicate that both the long memory and asymmetric behavior characterize the conditional volatility of oil and stock market returns. On the other hand, the dynamic conditional correlations (DCC) between the crude oil and US stock markets are affected by several economic and geopolitical events. When looking at the optimal design of an oil-stock portfolio, we find that investors in the US markets should have more stocks than crude oil asset in order to reduce their portfolio risk. Finally, the use of the DCC–FIAPARCH model that explicitly accounts for long memory and asymmetric volatility effects enables the investors to effectively hedge the risk of their stock portfolios with lower costs, compared to the standard DCC–GARCH model.

Suggested Citation

  • Chkili, Walid & Aloui, Chaker & Nguyen, Duc Khuong, 2014. "Instabilities in the relationships and hedging strategies between crude oil and US stock markets: Do long memory and asymmetry matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 354-366.
    • Handle: RePEc:eee:intfin:v:33:y:2014:i:c:p:354-366
    DOI: 10.1016/j.intfin.2014.09.003
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    More about this item

    Keywords

    Asymmetric volatility; Long memory; Crude oil; Stock returns; Hedging strategy;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G1 - Financial Economics - - General Financial Markets
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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