Abstract
This paper examines the dynamic dependence structure of crude oil and East Asian stock markets at multiple frequencies using wavelet and copulas. We also investigate risk management implications and diversification benefits of oil-stock portfolios by calculating and comparing risk and tail risk hedging performance. Our results provide strong evidence of time-varying dependence and asymmetric tail dependence between crude oil and East Asian stock markets at different frequencies. The level and fluctuation of their dependencies increase as time scale increases. Furthermore, we find the time-varying hedging benefits differ at investment horizons and reduced over the long run. Our results suggest that crude oil could be used as a hedge and safe haven against East Asian stock markets, especially in the short- and mid-term.
Highlights
Crude oil remained the world’s leading fuel, accounting for 33.6% of global energy consumption in 2018 and BP’s Statistical Energy Outlook suggests that it will continue to play a similar role until 2035.The influence of oil prices has become crucial for world economic development
The second way we contribute to literature is that we investigate the implications of their dependence and tail dependence for risk management purpose at different investment horizons
Portfolios at the multiple time scales. These results point to the value of using crude oil as a hedge and safe haven against East
Summary
Crude oil remained the world’s leading fuel, accounting for 33.6% of global energy consumption in 2018 and BP’s Statistical Energy Outlook suggests that it will continue to play a similar role until 2035. The influence of oil prices has become crucial for world economic development. It is fair to argue that oil remains to be one of the biggest drivers of the global economy. With the financialization of commodity markets, oil price have been concerned with macroeconomic factors, and have become a critical part in financial field. Since the correlations between commodity and stock markets are low, crude oil has become an alternative investment tool for international portfolio diversification [1,2]. Analyzing price relationships between crude oil and stock markets is an essential topic of modern finance, especially in derivative pricing, portfolio allocation and risk management
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