Oil price risk exposure of BRIC stock markets and hedging effectiveness

We study the tail dependence between crude oil and BRIC stock markets using a time-varying optimal copula (TVOC) approach. We show evidence of multiple tail dependence regimes, suggesting that simple static or dynamic copula specifications do not fully characterize the extreme dependence between oil...

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Bibliographic Details
Published in:Annals of operations research Vol. 313; no. 1; pp. 145 - 170
Main Authors: Shahzad, Syed Jawad Hussain, Bouri, Elie, Rehman, Mobeen Ur, Naeem, Muhammad Abubakr, Saeed, Tareq
Format: Journal Article
Language:English
Published: New York Springer US 01.06.2022
Springer
Springer Nature B.V
Subjects:
Analysis
Business and Management
Combinatorics
Crude oil
Crude oil prices
Diversification
Emerging markets
Equity
Exports
Hedging
Hedging (Finance)
Influence
Institutional investments
Methods
Operations research
Operations Research/Decision Theory
Original Research
Petroleum
Portfolio management
Prices and rates
Risk (Economics)
Risk exposure
Securities markets
Stock exchanges
Stock markets
Theory of Computation
Brazil
China
India
Russia
Q43
Crude oil
BRIC
G11
Hedging
Diversification
Time-varying optimal copula
Q41
ISSN:0254-5330, 1572-9338
Online Access:Get full text
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Summary:We study the tail dependence between crude oil and BRIC stock markets using a time-varying optimal copula (TVOC) approach. We show evidence of multiple tail dependence regimes, suggesting that simple static or dynamic copula specifications do not fully characterize the extreme dependence between oil and BRIC stock markets. The identified combinations of asymmetric and extreme positive lower tail dependence justify the application of the TVOC. Interestingly, the positive lower tail dependence between oil and stock markets and risk spillover from oil is higher for Brazil and Russia (oil exporters) than India and China (oil importers). Finally, we assess the effectiveness of hedging and measure the conditional diversification benefits of investing in oil for BRIC stock indices. Notably, the Chinese and Indian equity markets offer higher conditional diversification benefits when combined with oil in an equally weighted portfolio.
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ISSN:0254-5330
1572-9338
DOI:10.1007/s10479-021-04078-0