|
| |
| Mohamed El Hédi Arouri, Amine Lahiani and Duc Khuong Nguyen |
| |
| ''Oil-stock volatility transmission, portfolio selection and hedging'' |
| ( 2012, Vol. 32 No.4 ) |
| |
| |
| We employ a bivariate VAR-GARCH model of Ling and McAleer (2003) to examine the volatility transmission between oil prices and stock market sectors in the United States. We also compute the optimal weights and hedge ratios for oil-stock portfolio holdings and show how they can be used to build effective diversification and hedging strategy. Using daily data over the period from January 2, 1995 to December 17, 2010, we find evidence of significant volatility spillovers in both directions, from oil market to stock sectors and from stock sectors to oil market. Moreover, investors can improve the risk-adjusted performance of their portfolios of sector stocks by adding the oil asset. These results are crucial for portfolio management in the presence of the oil risk and the implementation of sector-specific policy actions. |
| |
| |
| Keywords: oil prices, US stock sectors, portfolio designs, hedge ratios, VAR-GARCH models |
JEL:
Q4 - Energy: General |
| |
| Manuscript Received : Mar 15 2012 | | Manuscript Accepted : Oct 08 2012 |
|
