Hedging and diversification across commodity assets

Ilyes Abid, Abderrazak Dhaoui, Stéphane Goutte and Khaled Guesmi

Applied Economics, 2020, vol. 52, issue 23, 2472-2492

Abstract: We investigate the conditional cross effects and volatility spillover between equity markets and commodity markets (oil and gold), Fama and French HML and SMB factors, volatility index (VIX) and bonds using different multivariate GARCH specifications considering the potential asymmetry and persistence behaviours. We analyse the dynamic conditional correlation between the US equity market and a set of commodity prices and risk factors to forecast the transmission of shock to the equity market firstly, and to determine and compare the optimal hedge ratios from the different models based on the hedging effectiveness of each model. Our findings suggest that all models confirm the significant returns and volatility spillovers. More importantly, we find that GO-GARCH is the best-fit model for modelling the joint dynamics of different financial variables. The results of the current study have implications for investors: (i) the equity market displays inverted dynamics with the volatility index suggesting strong evidence of diversification benefit; (ii) of the hedging assets gold appears the best hedge for the US equity market as it has a higher hedge effectiveness than oil and bonds over time; and (iii) despite these important results, a better hedge may be obtained by using well-selected firm sized and profitability-based portfolios.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2019.1693016 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Hedging and diversification across commodity assets (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:52:y:2020:i:23:p:2472-2492

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2019.1693016

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().