Do commodities hedge regional stock markets at the same effectiveness level? Evidence from MGARCH models

Purpose - This present work aims at looking into whether or not introducing commodities in international equity portfolios helps reduce the market risk and if hedging is carried out with the same effectiveness across different regional stock markets. Design/methodology/approach - The authors determine the optimal hedge ratios and hedging effectiveness of a number of commodity-hedged emerging and developed equity markets, using three versions of MGARCH model: DCC, ADCC and GO-GARCH. The authors also use a rolling window estimation procedure for the purpose of constructing out-of-sample one-step-ahead forecasts of dynamic conditional correlations and optimal hedge ratios. Findings - Empirical results evince that commodities significantly display effective risk-reducing hedge instruments in short and long runs. The main finding is that commodities do not seem to hedge regional stock markets in the same way. They tend to provide evidence of a rather effective hedging regarding mainly the East European and Latin American stock markets. Originality/value - The authors study whether commodities can hedge stock markets at regional context and if hedging effectiveness differ from one region to another.