Hedging Stocks with Oil

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See all articles by Jonathan A. Batten

Jonathan A. Batten

RMIT University; The University of Sydney

Harald Kinateder

Passau University

Peter G. Szilagyi

Central European University

Niklas Wagner

Passau University

Date Written: January 29, 2021

Abstract

We study the feasibility of hedging stocks with oil. The Dynamic Conditional Correlation (DCC) approach allows for the calculation of optimal hedge ratios and corresponding hedge portfolio returns. Our results show that there are distinct economic benefits from hedging stocks with oil, although the effectiveness of hedging is both time-varying and market-state-dependent. The event of the Global Financial Crisis (GFC) is shown to affect the effectiveness of hedging. During the GFC, a positive jump in the hedge ratios occurs and hedge effectiveness increases. Among a set of common financial and macroeconomic drivers, we identify the implied volatility index VIX as being the most important. During times of global financial uncertainty, investors reduce stock positions more than commodity positions, thus VIX shocks negatively affect the portfolio returns of stock-oil hedges. The results also show that an appreciation of the U.S. dollar against the euro is associated with reduced hedge portfolio returns. From the GFC onwards, we document an increased significance of the gold price and the term spread in explaining hedge portfolio returns.

Keywords: Beta-hedge, Brent oil, Commodities, Economic policy uncertainty (EPU), Hedge ratio, International asset pricing, Market risk, Systemic risk, WTI oil, VIX

JEL Classification: F15,F2,F36,G10,G15

Suggested Citation

Batten, Jonathan A. and Kinateder, Harald and Szilagyi, Peter G. and Wagner, Niklas F., Hedging Stocks with Oil (January 29, 2021). Energy Economics, Vol. 93, 104422, 2021, Available at SSRN: https://ssrn.com/abstract=

Jonathan A. Batten (Contact Author)

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria
Australia

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

The University of Sydney ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

HOME PAGE: http://https://business.sydney.edu.au/staff/jonathan.batten

Harald Kinateder

Passau University ( email )

Innstrasse 27
Passau, 94032
Germany

Peter G. Szilagyi

Central European University ( email )

Nador utca 9.
Budapest, 1051
Hungary
+36-1-887-5092 (Phone)
+36-1-887-5005 (Fax)

HOME PAGE: http://people.ceu.edu/peter_szilagyi

Niklas F. Wagner

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

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