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

Listed author(s):
  • Chkili, Walid
  • Aloui, Chaker
  • Nguyen, Duc Khuong

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S1042443114001140
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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 33 (2014)
Issue (Month): C ()
Pages: 354-366

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Handle: RePEc:eee:intfin:v:33:y:2014:i:c:p:354-366
DOI: 10.1016/j.intfin.2014.09.003
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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