 The effect of economic policy uncertainty on stock-commodity correlations and its implications on optimal hedgingIhsan Badshah (), Riza Demirer and Muhammad Tahir Suleman Energy Economics, 2019, vol. 84, issue C Abstract: Motivated by previous studies documenting significant return and volatility effects of economic policy uncertainty (EPU) on the stock market, this study examines whether EPU has an effect on the dynamic conditional correlations between stock and commodity returns. Our findings point to a positive and significant effect of EPU on stock-commodity correlations with particularly stronger effects in the case of energy and industrial metals. The EPU effect is stronger during weak economic conditions, while VIX as a proxy of market uncertainty is generally found to be insignificant. Finally, we show that the EPU effect on correlations has investment implications as well, implied by a significant effect on optimal hedge ratios in commodities in order to mitigate stock market risks. Our results underscore the importance of selective hedging strategies in which risk managers base the timing and size of their hedging programs on future price expectations, conditional on the level of policy uncertainty state and prevalent economic conditions. Keywords: Commodity market; Policy uncertainty; Conditional correlation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:84:y:2019:i:c:s0140988319303482 DOI: 10.1016/j.eneco.2019.104553 Access Statistics for this article Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant More articles in Energy Economics from Elsevier |
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