Can Crude Oil Serve as a Hedging Asset for Underlying Securities?—Research on the Heterogenous Correlation between Crude Oil and Stock Index

Sa Xu, Ziqing Du and Hai Zhang
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Sa Xu: School of Economics and Management, Hunan Institute of Technology, Hengyang 421002, China
Ziqing Du: College of Finance and Statistics, Hunan University, Changsha 410006, China
Hai Zhang: Department of Accounting & Finance, Strathclyde Business School, Glasgow G4 0QU, Scotland, UK

Energies, 2020, vol. 13, issue 12, 1-19

Abstract: In the increasingly frequent global financial turmoil, investors prefer to invest in stable assets to hedge risks. Crude oil naturally has dual use value as a general commodity and as a financial asset, which has attracted wide attention. In this paper, we adopt a wavelet coherence analysis to study the standard of crude oil as a hedging asset and analyze the dynamic correlation of crude oil and stock market price fluctuations in the four economies of the United States, Japan, China and Hong Kong at different frequencies. The empirical evidence shows that crude oil can be conditionally used as a hedging asset for underlying securities. From the perspective of space, crude oil is suitable for investors in China’s stock market as a hedging asset, while for stock markets in the US, Japan and Hong Kong, the ability of crude oil to hedge risk has been greatly weakened. From the perspective of investment term, although crude oil cannot be regarded as a hedging asset for long-term investment, it can still play a hedging role in the short term. When the market is in a state of panic, the ability of oil to hedge risk is stronger.

Keywords: oil price; stock markets; hedging; wavelet coherence (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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