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Oil as Hedge, Safe-Haven, and Diversifier for Conventional Currencies

Changyu Liu (), Muhammad Abubakr Naeem (), Mobeen Ur Rehman (), Saqib Farid () and Syed Jawad Hussain Shahzad ()
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Changyu Liu: Business School, Shandong Normal University, Jinan 250014, China
Muhammad Abubakr Naeem: School of Economics and Finance, Massey University, Auckland 24300, New Zealand
Mobeen Ur Rehman: Department of Accounting, Analysis and Audit, South Ural State University, 454080 Chelyabinsk, Russia
Saqib Farid: School of Business & Economics, University of Management & Technology, Lahore 54770, Pakistan

Energies, 2020, vol. 13, issue 17, 1-19

Abstract: The research investigates the safe-haven, hedging, and diversification function of crude oil for conventional currencies, among which five are major oil exporters, and six are major oil importers. In order to model time-varying dynamic correlations between crude oil and currencies, the study uses the Asymmetric-DCC model. The findings highlight low or negative correlations, especially during the crisis period. Next, we employ a quantile based regression framework and conclude distinct safe-haven and hedge functions of oil for major currencies. We provide additional evidence on the safe-haven, hedging, and diversification function of crude oil using the cross-quantilogram framework. The findings of out of sample analysis illustrate that the hedging effectiveness of oil is greater for oil-exporting countries. In addition, the conditional diversification benefit of oil is higher in the lower quantiles, i.e., when both foreign exchange and oil markets are in a bearish state. Finally, implications for investors, portfolio managers, and policymakers are further discussed.

Keywords: hedge; safe haven; crude oil; currency (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
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