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

PurposeThis 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/approachThe authors determine the...

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Bibliographic Details
Published in:International journal of emerging markets 2024-05, Vol.19 (5), p.1359-1384
Main Authors: Zghal, Rania, Melki, Amel, Ghorbel, Ahmed
Format: Article
Language:English
Subjects:
Commodities
Commodity prices
COVID-19
Economic crisis
Equity
Hedging
International finance
Investments
Investors
Literature reviews
Pandemics
Portfolios
Ratios
Risk reduction
Securities markets
Stochastic models
Stock exchanges
Volatility
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Summary:PurposeThis 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/approachThe 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.FindingsEmpirical 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/valueThe authors study whether commodities can hedge stock markets at regional context and if hedging effectiveness differ from one region to another.
ISSN:1746-8809
1746-8817
DOI:10.1108/IJOEM-09-2021-1420