Dynamic dependence and hedging strategies in BRICS stock markets with oil during crises

Heni Boubaker and Ons Ben Larbi

Economic Analysis and Policy, 2022, vol. 76, issue C, 263-279

Abstract: This paper discusses the asymmetric volatility spillovers between these two markets of BRICS’ countries during different financial and economic circumstances from 2010 until 2021, using the ARFIMA-FIAPARCH to model the dynamics of the marginal distribution. We study the feasibility of hedging stocks with oil, risk measurement functions allow financial practitioners to calculate the optimal hedge ratios and the corresponding to hedge portfolio returns. A dual long memory model is adopted to estimate the conditional mean and the conditional variance. Thereafter, a VaR,CVaR and ΔCVaR are applied to assess oil price exposure. Furthermore, to evaluate the optimal portfolio, we adopted the optimal portfolio weight, the optimal hedge ratio and the hedge effectiveness oil. Our results show that there are distinct economic benefits from hedging stocks with oil, although the effectiveness of hedging is both time-varying and market-state-dependent. We determine that the volatility transmission was time-varying and that influence from the Asian crisis, the bursting of the dot com bubble, the 2008 global financial crisis, the recent oil-price crash, and COVID 19 alternated between negative and positive values, over the entire studied period. During times of global financial uncertainty, investors reduce stock positions more than commodity positions, thus crude oil prices shock negatively affect the portfolio returns of stock-oil hedges. all stock market–oil pairs display the highest hedging effectiveness during the COVID-19 pandemic, which proved that the oil market can assist as a hedge for stock market in a portfolio.

Keywords: BRICS; Oil; Risk management; Asymmetric volatility; Crises; Optimal hedging ratio (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:76:y:2022:i:c:p:263-279

DOI: 10.1016/j.eap.2022.08.011

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