This analysis compares multivariate GARCH methods for spillover effects in petroleum prices and stock sector indices, suggesting improved hedging strategies.
This study compares four multivariate GARCH approaches in modelling bilateral return and volatility spillovers between petroleum prices and self-constructed stock sector indices of net petroleum exporters (Canada and Saudi Arabia) and net petroleum importers (the United States and China). The estimates are subsequently used to quantify optimal portfolio weights and hedge ratios and to evaluate the effectiveness of the resulting hedging strategies. The outputs point to the presence of heterogeneous volatility interdependencies, which are more evident for Canada and the United States. The optimal weight of petroleum is greater in portfolios comprising stock sector indices of Saudi Arabia and China, which also provide lower hedging costs. Time-varying conditional correlations, portfolio weights, and hedge ratios exhibit considerable variations, particularly during turbulent periods. Finally, the hedging strategies generated from the VAR-DCC-GARCH specification result in the greatest reduction, although not substantial, of risks for portfolios involving stock sector indices of all countries.
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Bagirov et al. (2025) studied this question.
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