Portfolio Diversification in Energy Markets

Valentina Galvani and Andre Plourde

No 2009-6, Working Papers from University of Alberta, Department of Economics

Abstract: This papers results indicate that futures for crude oil, natural gas and unleaded gasoline fail to enhance the performance of representative energy stocks in terms of return to risk, but do decrease the overall level of risk exposure borne by passive equity investors. Our findings suggest that futures contracts on energy commodities are valuable to market participants with an interest in hedging against price fluctuations in energy markets by buy-and-hold strategies. However, this conclusion is reversed when one takes the perspective of traders whose core interests can be better approximated through the return to risk-bearing. In fact, this paper documents that return-to-risk maximizing agents are unlikely to profit from trading energy futures in addition to energy stocks. Moreover, futures for energy commodities fail to offer significant diversification gains with respect to energy stocks once investors adopt simple dynamic trading strategies that rely on readily available pricing information.

Keywords: energy markets; diversification benefits; mean-variance spanning (search for similar items in EconPapers)
JEL-codes: G11 G32 M21 O13 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2009-01-31
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Portfolio diversification in energy markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2009_006

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