Generalized Hyperbolic Distribution and Portfolio Efficiency in Energy and Stock Markets of BRIC Countries

José Antonio Núñez-Mora,Eduardo Sánchez-Ruenes

doi:10.3390/ijfs8040066

José Antonio Núñez-Mora, Eduardo Sánchez-Ruenes

Open Access

https://doi.org/10.3390/ijfs8040066

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Abstract

Oil, also called black gold, is considered as the commodity which has the greatest impact on the world’s economy, and it has been studied in terms of its relationship and effects on macroeconomic variables such as Gross Domestic Product (GDP), inflation, trade balance, exchange rate and some others. Likewise, the relationship of oil with the financial market has been deepened and is very interesting in the case of emergent economies such as Brazil, Russia, India and China (BRIC) countries. There are many studies and approaches to this topic, but few of them focus on seeking investment opportunities through the diversification of these variables and therefore creating efficient portfolios using other distribution from the norm. This research proposes the construction of diversified portfolios with the returns of the indexes and oil mixes of the BRIC countries modeled under a Normal Inverse Gaussian (NIG) distribution, which is a notable member of the Generalized Hyperbolic (GH) family, and analyzing the effect on investment, by the inclusion of each variable into the portfolio. An important property of the GH family is that the correlations matrix of the returns is obtained from estimation of the parameters of empirical distribution through maximum likelihood. The results show in an optimal configuration, that each instrument of India, China and Brazil, contributes to the portfolio efficiency, in contrast to the index and oil mix of Russia, that do not contribute significantly.

Highlights

There are currently numerous investigations dealing with the relationship between the oil price and economic variables, including: Hamilton (1983, 2003); Davis and Haltiwanger (2001); Lee et al (2001); Lee and Ni (2002); Hooker (2002); Brown and Yücel (2002); Akram (2004); Jones et al (2004); Hamilton and Herrera (2004); Cunado and Gracia (2005); Lardic and Mignon (2006); Chen and Chen (2007); Huang and Guo (2007) and Nandha and Hammoudeh (2007) among others
We could intuit, excluding Russia, that it is possible to create a diversified portfolio, and we proved it through an empirical study
Employing a Multivariate Normal Inverse Gaussian test for the logarithmic returns it was possible to determine that Normal Inverse Gaussian assumptions hold even in the multivariate case fitting the empirical data appropriately

Summary

Introduction

There are currently numerous investigations dealing with the relationship between the oil price and economic variables, including: Hamilton (1983, 2003); Davis and Haltiwanger (2001); Lee et al (2001); Lee and Ni (2002); Hooker (2002); Brown and Yücel (2002); Akram (2004); Jones et al (2004); Hamilton and Herrera (2004); Cunado and Gracia (2005); Lardic and Mignon (2006); Chen and Chen (2007); Huang and Guo (2007) and Nandha and Hammoudeh (2007) among others. Hamilton’s seminal work in 1983, where it is argued that most financial crises in the United States are preceded by a significant increase in the price of oil, establishes a line of research that continues to this day to be very fruitful. There are several works with various methodologies that have studied, and continue to study, the interaction of oil and financial markets. In Wen et al (2019b) stocks and emerging markets from Brazil, Chile, Mexico, Russia, South Africa, India, South Korea, Thailand, China and Malaysia show a positive relationship with the oil market. The dependence between oil and stock markets is influenced by variables in each emergent economy but finding that uncertainty of American economy reinforces this link, and an American strengthened economy provokes a weaker relationship

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