Higher-order moments and co-moments' contribution to spillover analysis and portfolio risk management

Ramzi Nekhili and Elie Bouri

Energy Economics, 2023, vol. 119, issue C

Abstract: Unlike volatility, the skewness and kurtosis of asset returns are often neglected in the analysis of spillovers and risk management, although they capture the return asymmetry and fat-tailedness, respectively, arising from the non-normality of returns. In this paper, we provide evidence of the relevance and utility of considering spillovers in volatility and higher-order moments (skewness, and kurtosis) and co-moments (covariance, co-skewness, and co-kurtosis), and their implications for hedging. Using high-frequency data on the US stock, crude oil, and gold markets, a time-varying spillover approach and portfolio analysis, we reveal the following results. Firstly, besides volatility and covariance, co-skewness and co-kurtosis are relevant spillover transmitters across the stock, crude oil, and gold markets. Secondly, the level of total spillover increases when including not only covariance but also co-skewness and co-kurtosis, suggesting the relevance of considering higher order co-moments beyond volatility when studying spillovers. Thirdly, the inclusion of co-moments in the spillover analysis generates a significant improvement in hedging for all pairs, which is reflected in the significant increase in the utility function when co-skewness and co-kurtosis are considered. This result is noted when the COVID-19 sub-period is considered separately, except for oil‑gold. Overall, the findings matter for the system of interconnectivity across various assets and emphasize the implications and contributions of higher-order moments and co-moments to portfolio allocation and financial risk management.

Keywords: Volatility; Co-skewness and co-kurtosis; Spillovers in higher-order moments; Portfolio hedging and utility function; US stock ETF; Crude oil and gold ETFs; COVID-19 outbreak (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:119:y:2023:i:c:s0140988323000944

DOI: 10.1016/j.eneco.2023.106596

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