The relationships between petroleum and stock returns: An asymmetric dynamic equi-correlation approach

Zhiyuan Pan, Yudong Wang and Li Liu

Energy Economics, 2016, vol. 56, issue C, 453-463

Abstract: In this paper, we propose an asymmetric dynamic equi-correlation (ADECO) model to investigate the correlations between returns of petroleum futures and stock indices. Our ADECO reveals the in-sample significant asymmetric effect in oil–stock correlations. To evaluate out-of-sample performance, we consider a portfolio with petroleum futures and stocks in which the weights are determined by forecasts of covariance matrix. We find that ADECO provides portfolios with better performances than existing popular DECO, DCC and ADCC models in the minimum-variance framework. Moreover, energy price risk can be better hedged by stocks in oil-exporting countries than stocks in oil-importing countries. Our findings are further demonstrated to be robust to the change of futures maturity.

Keywords: Asymmetry; Equi-correlation; Petroleum futures; Stock market; Portfolio (search for similar items in EconPapers)
JEL-codes: C22 C32 G17 G32 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:56:y:2016:i:c:p:453-463

DOI: 10.1016/j.eneco.2016.04.008

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