Addressing COP21 using a Stock and Oil Market Integration Index Energy Policy. Energy Policy. 2018;116:127-36. Abstract
Addressing COP21 using a Stock and Oil Market Integration Index Energy Policy
COP21 implementation should lead to a decline in the future demand for fossil fuels. One key implication for investors is how to best manage this risk. We construct a monthly integration index and then demonstrate that oil investors can offset adverse oil price risk by holding various global stock portfolios. The portfolios are formed from eight different combinations of developed and emerging stock markets. We show that measuring the degree of stock-oil market integration for these portfolios is critical to managing the time-varying degrees of integration that exist between oil and stock markets. Importantly, under normal market conditions, when markets are segmented, there is the opportunity for oil investors to diversify the additional energy price risk, caused by COP21, through the purchase of stocks. The optimal oil-stock diversified portfolio provides risk-adjusted positive benefits to investors, with the weightings changing over time as COP21 implementation proceeds.
Can Stock Market Investors Hedge Energy Risk? Evidence from Asia. Energy Economics. 2017;66:559-70. Abstract
Can Stock Market Investors Hedge Energy Risk? Evidence from Asia
The relationship between energy and stock prices is investigated in the context of Asia, including China and Japan. Oil, gas and coal prices are considered both individually and as an energy portfolio. Consistent with evidence from international markets, during the post Global Financial Crisis (GFC) period, Asian stock markets moved in tandem with oil prices. However, using asset pricing and portfolio theory, we identify a time-varying integration between individual stock markets and the energy portfolio, which in turn may limit the benefit of risk reduction through diversification. This relation can also be used to hedge the common factor arising from energy risk. Doing so provides benefits to investors in the form of positive time-varying risk adjusted returns.
Should Emerging Market Investors Buy Commodities? Applied Economics. 2015;47(39):4228-46. Abstract
Should Emerging Market Investors Buy Commodities?
One reason that investors hold commodities is to receive diversification benefits. However, while an extensive set of existing studies demonstrate diversification benefits when investors hold international stocks or bonds, they are generally silent on the implications of holding commodities. Using an asset pricing framework, we investigate the benefits to investors from holding commodities, both individually and in portfolios. Generally, commodity and stock markets are integrated, although there are time-varying benefits to investors that are subject to sample period selection and investment horizon. We show that Asian investors receive positive risk adjusted returns in gold and rice markets but not in any of the other commodity markets investigated. The risk adjusted returns are time-varying: during the Asian financial crisis risk adjusted returns were negative – a penalty for investing in commodities – whereas during the global financial crisis the reverse was true and investors earned positive excess returns. The time-varying nature of the benefits that arise from diversification in commodities and their breakdown during periods of crisis, highlight the problems that investors may face when using commodities for long-term investment in addition to traditional holdings of stocks and bonds.