Petroleum prices and equity sector returns in petroleum exporting and importing countries: an analysis of volatility transmissions and hedging

Miramir Bagirov and Cesario Mateus

Applied Economics, 2022, vol. 54, issue 23, 2610-2626

Abstract: This paper examines the direction and magnitude of volatility transmissions between prices of petroleum and stock sector indices of the net petroleum exporter, Mexico, and the net petroleum importer, the United Kingdom. The sector indices are self-constructed utilizing daily data of 258 unique stocks listed in eight sectors from January 2005 to September 2018 that permits implementing the same methodological framework across two markets. The study applies the VAR-GARCH model that enables to study bidirectional spillover effects. The results provide evidence of volatility spillovers between petroleum prices and sector indices. The effects are more apparent in the case of the net exporter, where the bidirectional volatility transmissions were observed. The computed optimal portfolio weights and hedge ratios considerably vary among sectors of both countries. The findings emphasize the crucial role of comprehending the heterogeneity of sectors for the management of investment portfolios.

Date: 2022
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DOI: 10.1080/00036846.2021.1990846

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