Energy portfolio risk management using time-varying copula methods: application to bonds, interest rate and VIX

Abstract

This work is concerned with the statistical modelling of hedging and safe haven strategies between the energy sector (crude oil), bonds, VIX and interest rate using the concept of copulas and proposes a method for choosing the best asset in order to hedge against extreme fluctuations of energy prices based on the combination of time series. Various copula functions are used to model the dependence structure between oil and different assets (interest rates, bonds and VIX). We investigate whether there are significant changes in the relationships between energy sector and these assets especially for different horizons of investment: the global financial crisis (06/27/2008 to 12/31/2009), the sovereign debt crisis in Europe (01/04/2010 to 12/31/2012) and the post-crisis period (01/02/2013 to 02/24/2016). Results show that TRUS is the best hedge for the energy sector because it presents the highest hedge ratio in most cases. The implied volatility (VIX) provides the second highest hedging ratio indicating the usefulness of a volatility index in hedging oil prices. Second, hedge ratios vary considerably over the sample as a consequence of the change in the dependence structure and the horizon of investment period indicating that hedged positions should be updated regularly.