Structural Breaks, Dynamic Correlations, Volatility Transmission, and Hedging Strategies for International Petroleum Prices and U.S. Dollar Exchange Rate - Economic Research Forum (ERF)

This paper investigates asymmetric volatility spillovers, forecasts and portfolio diversification between the USD/euro exchange market and each of the major spot petroleum markets of WTI, Europe Brent, kerosene, gasoline and propane, using the bivariate exponential GARCH (EGARCH) model. The results provide evidence of significant asymmetric volatility spillovers between the U.S. dollar exchange rate and those petroleum markets. Moreover, we conclude that the persistence of volatility in all paired exchange ratepetroleum markets declines when structural breaks are controlled for in the model. Moreover, integrating the information concerning the structural breaks in this model improves the accuracy of the estimates of volatility dynamics and future volatility forecasts. Additionally, we analyze the optimal portfolio weights and hedge ratios based on the estimates of the bivariate EGARCH model with and without the structural breaks to demonstrate the relevance of our empirical results to investors in terms of developing appropriate hedging and asset allocation strategies. Thus, the findings have important implications for financial risk management, portfolio diversification, and monetary and fiscal policy operations for oilexporting and -importing countries.

Research Fellows

Walid Mensi

Assistant Professor, Department of Finance and Economics, Sultan Qaboos University, Oman


Research Fellows

Shawkat Hammoudeh

Associate Professor, Department of Economics, Drexel University


Seong-Min Yoon


Project

EVENTS

There are no Events PAST



Related Publications

Working Papers

Sukuk Market Development and Islamic Banks’ Capital Ratios

Houcem Smaoui and Hatem Ghouma

This paper investigates the impact of Sukuk market development on Islamic banks’ capital ratios ... read more



Working Papers

Islamic finance and herding behavior theory: a sectoral analysis for Gulf Islamic stock market

Imed Medhioub and Mustapha Chaffai

This study examines herding behavior in four sectors of the Gulf Islamic stock markets. Based ... read more