Portfolio Diversification and Oil Price Shocks: A Sector Wide Analysis

International Journal of Energy Economics and Policy, 2019, 9(3), 251-260.

10 Pages Posted: 6 May 2019

See all articles by Mohsin Ali

Mohsin Ali

Taylor's University

Wajahat Azmi

International Centre for Education in Islamic Finance (INCEIF)

Aftab Parvez Khan

Citi College of Canadian Careers

Date Written: March 25, 2019

Abstract

This paper investigates the time-varying relationship between the oil price and disaggregated stock market of India using dynamic conditional correlation multivariate GARCH and continuous wavelet transformation modelling approaches. Our findings reveal the evolving relationship between the oil price and disaggregated stock market. The correlations are generally volatile before the 2007-2008 crisis but since then the correlations are positive implying no diversification benefits for the investors during rising oil prices. As emerging markets in general, and India in particular, is expected to increase its share of oil consumption in the world’s energy market, therefore for the stock market to grow, especially the oil-intensive industries, we recommend the government should increase its reliance on alternative energy resources. Furthermore, as rising oil prices can also have its adverse effect through exchange rate channel, we suggest the monetary policies should be time varying to manage the oil inflationary pressures arising out of extreme volatility in the oil prices.

Keywords: Dynamic Conditional Correlation Multivariate GARCH, Continuous Wavelet Transformation, Disaggregated Stock Market, India, Oil Price Shocks, Diversification

JEL Classification: C50, G10, O53, Q43

Suggested Citation

Ali, Mohsin and Azmi, Wajahat and Khan, Aftab Parvez, Portfolio Diversification and Oil Price Shocks: A Sector Wide Analysis (March 25, 2019). International Journal of Energy Economics and Policy, 2019, 9(3), 251-260. , Available at SSRN: https://ssrn.com/abstract=3369717

Mohsin Ali (Contact Author)

Taylor's University ( email )

Malaysia
47500 (Fax)

Wajahat Azmi

International Centre for Education in Islamic Finance (INCEIF)

Kuala Lumpur
Malaysia

Aftab Parvez Khan

Citi College of Canadian Careers

Canada

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