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Dependence Structure between Oil Prices, Exchange Rates, and Interest Rates

Jong-Min Kim and Hojin Jung

Year: 2018
Volume: Volume 39
Number: Number 2
DOI: 10.5547/01956574.39.2.jkim
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Abstract:
This article unveils the dependence structure between crude oil prices, exchange rates, and the United States interest rates. We begin by using asymmetric GARCH models to examine the marginal behavior of the returns, and then various copulas are used to understand extreme market co-movements. We also investigate the causal relationship and the spillover effects by using the Granger causality test and the BEKK representation of a multivariate GARCH process. Over the 1998-2017 period, we find evidence of an inverse relationship between the U.S. interest rates and the crude oil prices. Oil-exchange rate linkages become stronger for most of the oil dependent countries considered in this article in the aftermath of the global financial crisis. There is also asymmetric tail dependence for almost all of the oil-exchange rate pairs. The results of Granger causality tests mainly indicate that crude oil prices Granger cause exchange rates. We also find that there are unidirectional volatility spillovers from WTI to exchange rates for oil exporting countries and to the U.S. interest rates. These findings provide important implications for investors to hedge the possible risk with international portfolio diversification.



Comparing the Risk Spillover from Oil and Gas to Investment Grade and High-yield Bonds through Optimal Copulas

Md Lutfur Rahman, Syed Jawad Hussain Shahzad, Gazi Salah Uddin, and Anupam Dutta

Year: 2022
Volume: Volume 43
Number: Number 1
DOI: 10.5547/01956574.43.1.mrah
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Abstract:
This paper compares the tail dependence and risk spillovers from the oil and gas to high-yield (HY) and investment grade (IG) bond markets. We use time-varying optimal copula framework to examine the dependence and further quantify upside and downside risk spillovers. We also explore how energy futures can be used to hedge risk of HY and IG bond portfolios. Our results show that the bond returns are more sensitive to risk shocks in the oil market compared to gas market. We find both negative and positive tail dependence between the bond and energy pairs and the relationship is stronger during the oil-crunch period. The dependence however is asymmetric across the tails. Finally, compared to oil futures, gas futures are found to be better hedge for the bond investment. These results can help in managing portfolio risk and designing optimal asset allocation strategies. These might also assist in formulating policies and regulations to manage the effects of cross-market risk transmissions.



Downside Risk and Portfolio Optimization of Energy Stocks: A Study on the Extreme Value Theory and the Vine Copula Approach

Madhusudan Karmakar and Samit Paul

Year: 2023
Volume: Volume 44
Number: Number 2
DOI: 10.5547/01956574.44.2.mkar
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Abstract:
Energy stocks are potentially a hedge against inflation and have a number of advantages over other forms of energy investing. This motivates us to study on portfolio management of energy stocks. We compare the performance of proposed GARCH-EVT-vine copula models under three different dimensions with other competing models using energy stocks from the U.S. market. In our proposed model, we use static C- and D-vine copulas. We compare the accuracy and efficiency of different models in forecasting portfolio VaR and CVaR. We also examine whether the proposed models yield greater economic and statistical performances than the competing models in a tactical asset allocation framework. Our findings indicate that the proposed models perform best overall. In fact, the relatively better performance of the proposed model is even more prominent when the portfolio size increases. Further, the comparative analysis between GARCH-EVT- static vine and GARCH-EVT-dynamic vine copula models produces mixed results.





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