Portfolio and hedging effectiveness of financial assets of the G7 countries

• Published in: Eurasian economic review 2018-08, Vol.8 (2), p.183-213
• Main Authors: Izadi, Selma, Hassan, M. Kabir
• Format: Article
• Language: English
• Subjects: Bond markets; Commodity futures; Commodity prices; Corn; Crude oil; Diversification; Economic crisis; Economic models; Economics; Economics and Finance; Equity; Eurozone; Gold; Hedging; Industrialized nations; International finance; Investor behavior; Markets; Original Paper; Portfolio management; Portfolio performance; Portfolios; Precious metals; Rates of return; Research methodology; Securities markets; Silver; Soya beans; Soybeans; Stochastic models; Stock exchanges; Volatility; Wheat
• ISSN: 1309-422X; 2147-429X
• DOI: 10.1007/s40822-017-0090-0

In this paper we investigate the dynamic conditional correlations between the equity and commodity returns for G7 countries from January, 2000 to October, 2014. The commodity futures include Brent, crude, gold, silver, wheat, corn and soybean futures, BCOM and CRB which are two aggregate commodity price indices. The results illustrate the lowest dynamic conditional correlations belong to the portfolios that include gold, wheat and corn futures for all the Equity indices. In addition, the correlations between the gold/equity pairs are negative during the financial crisis. This fact indicates the benefit of hedging stock portfolios with gold futures whenever we have stress in the financial markets. The findings from hedging effectiveness suggest that there are diversification advantages for all the commodity/stock portfolios than only stock portfolios. Finally, including CRB, BCOM and gold future to stock portfolios provides the optimal hedging effectiveness ratios. These findings can be helpful in developing new commodity indices.