Trading-hour and nontrading-hour volatility in crude oil and U.S. dollar markets and its implications for portfolio optimization

Yu-Sheng Lai

Journal of Commodity Markets, 2025, vol. 38, issue C

Abstract: The covariance between crude oil prices and U.S. dollar exchange rates is crucial for energy investors, and stock prices differ between trading and nontrading hours. Thus, the present study uses a two-component generalized autoregressive conditional heteroskedasticity (GARCH) model to analyze whole-day returns. Our analysis of data from 2007 to 2021 reveals that trading-hour and nontrading-hour returns contain crucial information for modeling whole-day covariance. Additionally, out-of-sample portfolio comparisons indicate that a two-component model is more effective than simpler models for portfolio optimization, resulting in substantial basis point fees when switching from the static to the two-component model. Crucially, the economic value generated by the two-component model is not offset by reasonable transaction costs; more risk-averse investors can generate higher benefits.

Keywords: Crude oil prices; Forecast evaluations; Intraday volatility; Overnight volatility; Portfolio optimization; U.S. dollar exchange rates (search for similar items in EconPapers)
JEL-codes: C32 F31 G11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:38:y:2025:i:c:s2405851325000236

DOI: 10.1016/j.jcomm.2025.100479

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