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The diminishing hedging role of crude oil: Evidence from time varying financialization

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  • Sharma, Shahil
  • Rodriguez, Ivan

Abstract

Using daily data from 1999 to 2019, we document a diminishing hedging role that crude oil plays for the stock market as a result of growing financialization. With interest rates driven near zero after the crisis of 2007-2009 and the extreme volatility of oil prices, vector autoregressions (VARs) suggest larger roles of oil prices in explaining stock returns during the 2007-2009 crisis and afterwards. We also find increased co-movement between stock and oil during the post-crisis period. Our results indicate that more short positions in crude oil are required to hedge long positions in equity markets during the post-crisis period, i.e., it costs more to use crude oil investments as a hedging tool compared to pre-crisis period. Therefore, investors holding a mixed portfolio of stocks and oil enjoy lower diversification benefits.

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  • Sharma, Shahil & Rodriguez, Ivan, 2019. "The diminishing hedging role of crude oil: Evidence from time varying financialization," Journal of Multinational Financial Management, Elsevier, vol. 52.
    • Handle: RePEc:eee:mulfin:v:52-53:y:2019:i::s1042444x19301392
    DOI: 10.1016/j.mulfin.2019.100593
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    More about this item

    Keywords

    Crisis; Crude oil; Financialization; Hedging; Stock markets;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G4 - Financial Economics - - Behavioral Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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