Abstract
Nonlinear, symmetric, and asymmetric dependence characteristics in energy equity sectors matter to portfolio investors and risk managers because of the risks and diversification opportunities they entail. Specifically, nonlinear dependence dynamics between assets are harder to predict, monitor, and manage, and can make investment positions go wrong unexpectedly. In this paper, we investigate whether the dependence dynamics of US and Canadian large-capitalized energy equity portfolios are nonlinear, symmetric, or asymmetric. We draw our results by implementing a robust copula approach based on time-varying parameter copulas and vine copula methods. Both time varying parameter and vine-copula methods indicate that the Canadian energy sector portfolio is driven by nonlinear negative tail asymmetric dependence during the global financial crisis and when the full sample period is employed. On the other hand, it displays nonlinear symmetric dependence during the oil price crisis, implying the need for close monitoring and rebalancing and a more continuous assessment of long investment positions. The US energy sector portfolio is driven by positive tail asymmetric dependence, and by symmetric dependence dynamics during crisis and non-crisis periods.
Published Version
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