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Asymmetric Long Memory in Volatility Relationships between Oil and BRIC Stock Markets

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This paper investigates the transmission of volatility and shocks between crude oil futures market and BRIC stock markets using the univariate and multivariate FIGARCH and FIAPARCH models. We also analyze the optimal weights and hedge ratio for building optimal portfolios to minimize the exposure to risk from oil futures price changes. Our empirical results show strong evidence of asymmetry and long memory properties in the conditional variances of all the series considered. Using multivariate models, we find the bi-directional volatility spillover between crude oil futures and BRIC stock markets. In addition, our examination of optimal weights and hedge ratios suggests that investors can hedge the oil price risk effectively by adding the oil asset into a well-diversified portfolio and using the short position of BRIC stock indices. These findings are of practical importance to financial market participants and may be useful in making optimal portfolio allocation decisions and developing cross-market hedging strategies.

Abstract

This paper investigates the transmission of volatility and shocks between crude oil futures market and BRIC stock markets using the univariate and multivariate FIGARCH and FIAPARCH models. We also analyze the optimal weights and hedge ratio for building optimal portfolios to minimize the exposure to risk from oil futures price changes. Our empirical results show strong evidence of asymmetry and long memory properties in the conditional variances of all the series considered. Using multivariate models, we find the bi-directional volatility spillover between crude oil futures and BRIC stock markets. In addition, our examination of optimal weights and hedge ratios suggests that investors can hedge the oil price risk effectively by adding the oil asset into a well-diversified portfolio and using the short position of BRIC stock indices. These findings are of practical importance to financial market participants and may be useful in making optimal portfolio allocation decisions and developing cross-market hedging strategies.

참고문헌 (69)

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