Empirical Analysis of Oil Risk-Minimizing Portfolios: The DCC–GARCH–MODWT Approach

27 Pages Posted: 28 Jan 2020

See all articles by Dejan Živkov

Dejan Živkov

Novi Sad Business School

Jovan Njegić

Novi Sad Business School

Vladimir Zakic

University of Belgrade - Faculty of Agriculture

Date Written: 2019

Abstract

This paper strives to analyze hedging strategies between Brent oil and six other heterogeneous assets – American ten-year bonds, US dollars, gold, natural gas futures, corn futures, and Europe, Australasia and Far East exchange-traded funds (EAFE- ETFs) – observing five wavelet time horizons and considering three different risk metrics: variance, value-at-risk (VaR) and conditional value-at-risk (CVaR). We construct two-asset portfolios, whereby conditional variances and covariances are obtained via a bivariate rolling dynamic conditional correlation–generalized autoregressive conditional heteroscedasticity (DCC–GARCH) model. Results indicate that gold is the best combination with Brent for minimum-variance investors, while the Brent–natural gas pair produces the worst minimum-variance results due to the very high unconditional variance of gas. As for VaR and CVaR results, we find that Brent with gold gives relatively good outcomes, but the portfolio with gas heavily outperforms the portfolio with gold when one views longer time horizons. This happens because the Brent–gas portfolio has very low skewness and kurtosis on longer time horizons compared with the unhedged portfolio, and these characteristics favor good VaR and CVaR results. These findings could help global portfolio managers and investors who seek various ways to diversify their Brent oil investments, who act on different time horizons, and who target different risk-minimizing goals.

Keywords: oil hedging, portfolio, risk-minimizing metrics, heterogeneous assets, wavelet, rolling DCC–GARCH model

Suggested Citation

Živkov, Dejan and Njegić, Jovan and Zakic, Vladimir, Empirical Analysis of Oil Risk-Minimizing Portfolios: The DCC–GARCH–MODWT Approach (2019). Journal of Operational Risk, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3526135

Dejan Živkov (Contact Author)

Novi Sad Business School

Vladimira Perica-Valtera 4
Bulevar kralja Petra I 38
Novi Sad, 21000
Serbia

Jovan Njegić

Novi Sad Business School ( email )

Vladimira Perica-Valtera 4
Bulevar kralja Petra I 38
Novi Sad, 21000
Serbia

Vladimir Zakic

University of Belgrade - Faculty of Agriculture ( email )

6 Nemanjina Str
Zemun, 11080
Serbia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2
Abstract Views
417
PlumX Metrics