Regional and copula estimation effects on EU and US energy equity portfolios

Waqas Hanif, Jose Arreola-Hernandez, Syed Jawad Hussain Shahzad, Thi Hong Van Hoang and Seong-Min Yoon
Authors registered in the RePEc Author Service: Jose Arreola Hernandez

Applied Economics, 2020, vol. 52, issue 49, 5311-5342

Abstract: The aim of this paper is to investigate the regional interdependence structure of energy equities in the US and in the EU. Based on weekly stock prices of 28 big energy firms in the two regions from 2008 to 2019, we compare the efficiency of using bivariate or multivariate copulas to describe the dependence structure of energy equities. Furthermore, we investigate the impact of the choice between these two methods on the performance of energy equity portfolios. Our empirical results show that multivariate copulas, such as C-Vine, allow to better describe the dependence structure of energy equities. We also find that there is a stronger and more complex dependence structure among EU energy equities than among US energy equities. Our scenario analysis also shows that the dependence structure is stronger during the GFC while being weaker during the ESDC. More importantly, the correlation matrix obtained from the multivariate copula method allows to obtain optimal mean-CVaR portfolios with a higher performance than that from the bivariate copula method. More importantly, optimal portfolios constituted with multivariate copulas allow to reduce the portfolio’s sensitivity to oil prices.

Date: 2020
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/00036846.2020.1763244

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