Do the crude oil futures of the Shanghai International Energy Exchange improve asset allocation of Chinese petrochemical-related stocks?

Abstract

The Shanghai International Energy Exchange (INE) facilitates both local and international investment in Chinese petrochemical-related stocks through local crude oil futures. This study investigates whether the Chinese emerging market can better aid investors' risk hedging and asset allocation compared to two major international developed markets–the Brent and West Texas Intermediate (WTI) crude oil futures markets—and examines the pairwise risk hedging effects and multi-asset allocation performance of INE and petrochemical-related stocks. The results show that INE has higher hedge effectiveness than Brent and WTI under pairwise hedging. Further, in multi-asset allocation, the portfolios containing INE outperform other portfolios. Overall, INE results in a better diversification effect and volatility reduction than the use of WTI crude oil futures to construct multi-asset allocation with Chinese petrochemical-related stocks. However, INE performance is inferior to Brent's in terms of constructing portfolios with oil or energy stocks. Finally, our results are robust to the five factors proposed by Fama and French (2015) in asset pricing.