The Effect of Economic Policy Uncertainty on Stock-commodity Correlations and Its Implications on Optimal Hedging

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aut.filerelease.date2021-10-31
aut.relation.articlenumber104553en_NZ
aut.relation.endpage104553
aut.relation.journalEnergy Economicsen_NZ
aut.relation.startpage104553
aut.researcherBadshah, Ihsan
dc.contributor.authorBadshah, Ien_NZ
dc.contributor.authorDemirer, Ren_NZ
dc.contributor.authorSuleman, Ten_NZ
dc.date.accessioned2019-10-31T01:51:34Z
dc.date.available2019-10-31T01:51:34Z
dc.date.copyright2019-10en_NZ
dc.date.issued2019-10en_NZ
dc.description.abstractMotivated by previous studies documenting significant return and volatility effects of economic policy uncertainty (EPU) on the stock market, this study examines whether EPU has an effect on the dynamic conditional correlations between stock and commodity returns. Our findings point to a positive and significant effect of EPU on stock-commodity correlations with particularly stronger effects in the case of energy and industrial metals. The EPU effect is stronger during weak economic conditions, while VIX as a proxy of market uncertainty is generally found to be insignificant. Finally, we show that the EPU effect on correlations has investment implications as well, implied by a significant effect on optimal hedge ratios in commodities in order to mitigate stock market risks. Our results underscore the importance of selective hedging strategies in which risk managers base the timing and size of their hedging programs on future price expectations, conditional on the level of policy uncertainty state and prevalent economic conditions.
dc.identifier.citationEnergy Economics (2019), doi: https://doi.org/10.1016/j.eneco.2019.104553
dc.identifier.doi10.1016/j.eneco.2019.104553en_NZ
dc.identifier.issn0140-9883en_NZ
dc.identifier.urihttps://hdl.handle.net/10292/12950
dc.languageenen_NZ
dc.publisherElsevier BVen_NZ
dc.relation.urihttps://www.sciencedirect.com/science/article/pii/S0140988319303482?via%3Dihub
dc.rightsCopyright © 2019 Elsevier Ltd. All rights reserved. This is the author’s version of a work that was accepted for publication in (see Citation). Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. The definitive version was published in (see Citation). The original publication is available at (see Publisher's Version).
dc.rights.accessrightsOpenAccessen_NZ
dc.subjectCommodity market; Policy uncertainty; Conditional correlation
dc.titleThe Effect of Economic Policy Uncertainty on Stock-commodity Correlations and Its Implications on Optimal Hedgingen_NZ
dc.typeJournal Article
pubs.elements-id364886
pubs.organisational-data/AUT
pubs.organisational-data/AUT/Business, Economics & Law
pubs.organisational-data/AUT/Business, Economics & Law/Finance
pubs.organisational-data/AUT/Business, Economics & Law/Finance/Finance PBRF 2012
pubs.organisational-data/AUT/Faculty of Business, Economics and Law
pubs.organisational-data/AUT/Faculty of Business, Economics and Law/Finance
pubs.organisational-data/AUT/PBRF
pubs.organisational-data/AUT/PBRF/PBRF Business Economics and Law
pubs.organisational-data/AUT/PBRF/PBRF Business Economics and Law/Faculty Review Team PBRF 2018
pubs.organisational-data/AUT/PBRF/PBRF Business Economics and Law/Finance Department PBRF 2018
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