Oil price risk exposure of BRIC stock markets and hedging effectiveness

Shahzad, Syed Jawad Hussain; Bouri, Elie; Rehman, Mobeen Ur; Naeem, Muhammad Abubakr; Saeed, Tareq

Abstract

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.

Citation

Shahzad, S. J. H., Bouri, E., Rehman, M. U., Naeem, M. A., & Saeed, T. (2022). Oil price risk exposure of BRIC stock markets and hedging effectiveness. Annals of Operations Research, 313(1), 145-170. https://doi.org/10.1007/s10479-021-04078-0

• Journal Article Type: Article
• Acceptance Date: Apr 8, 2021
• Online Publication Date: Apr 21, 2021
• Publication Date: 2022-06
• Deposit Date: Jan 22, 2025
• Journal: Annals of Operations Research
• Print ISSN: 0254-5330
• Electronic ISSN: 1572-9338
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 313
• Issue: 1
• Pages: 145-170
• DOI: https://doi.org/10.1007/s10479-021-04078-0
• Public URL: https://keele-repository.worktribe.com/output/1044301
• Additional Information: Accepted: 8 April 2021; First Online: 21 April 2021