Oil price risk exposure of BRIC stock markets and hedging effectiveness

Syed Jawad Hussain Shahzad, Elie Bouri (), Mobeen Ur Rehman (), Muhammad Abubakr Naeem () and Tareq Saeed ()
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Elie Bouri: Lebanese American University
Mobeen Ur Rehman: South Ural State University
Muhammad Abubakr Naeem: University College Dublin
Tareq Saeed: King Abdulaziz University

Annals of Operations Research, 2022, vol. 313, issue 1, No 7, 145-170

Abstract: Abstract We study the tail dependence between crude oil and BRIC stock markets using a time-varying optimal copula (TVOC) approach. We show evidence of multiple tail dependence regimes, suggesting that simple static or dynamic copula specifications do not fully characterize the extreme dependence between oil and BRIC stock markets. The identified combinations of asymmetric and extreme positive lower tail dependence justify the application of the TVOC. Interestingly, the positive lower tail dependence between oil and stock markets and risk spillover from oil is higher for Brazil and Russia (oil exporters) than India and China (oil importers). Finally, we assess the effectiveness of hedging and measure the conditional diversification benefits of investing in oil for BRIC stock indices. Notably, the Chinese and Indian equity markets offer higher conditional diversification benefits when combined with oil in an equally weighted portfolio.

Keywords: Crude oil; BRIC; Time-varying optimal copula; Hedging; Diversification (search for similar items in EconPapers)
JEL-codes: G11 Q41 Q43 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10479-021-04078-0

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