Are the interdependence characteristics of the US and Canadian energy equity sectors nonlinear and asymmetric? |
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| Institution: | 1. Department of Management Sciences, COMSATS University Islamabad, Attock Campus, Pakistan;2. Rennes School of Business, Rennes City, Brittany, France;3. Schulich School of Business, York University, Toronto, Canada;4. Department of Economics, Pusan National University, Busan, Republic of Korea;1. Research Center of the Central China for Economic and Social Development, Nanchang University, 330031 Nanchang, PR China;2. School of Economics and Management, Nanchang University, 330031 Nanchang, PR China;3. Business School, Hunan University, 410082 Changsha, PR China;1. Department of Tourism and Hospitality, TransWorld University, No. 1221, Zhennan Rd., Douliu City, Yunlin County 640, Taiwan;2. Department of Economics, Soochow University, No. 56, Kueiyang Street, Section 1, Taipei 100, Taiwan;1. Patrick E. Molony Professor, Department of Economics, Auburn University, 138 Miller Hall, Auburn, AL 36849, United States;2. Department of Economics, University of California Santa Cruz, 1156 High Street, Santa Cruz, CA 95064, United States;1. Graduate School of Management, National Taiwan University of Science and Technology, Taiwan;2. Department of Risk Management and Insurance, National Chengchi University, Taiwan;3. School of Business, Central South University, China;4. Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taiwan |
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| Abstract: | Nonlinear, symmetric, and asymmetric dependence characteristics in energy equity sectors matter to portfolio investors and risk managers because of the risks and diversification opportunities they entail. Specifically, nonlinear dependence dynamics between assets are harder to predict, monitor, and manage, and can make investment positions go wrong unexpectedly. In this paper, we investigate whether the dependence dynamics of US and Canadian large-capitalized energy equity portfolios are nonlinear, symmetric, or asymmetric. We draw our results by implementing a robust copula approach based on time-varying parameter copulas and vine copula methods. Both time varying parameter and vine-copula methods indicate that the Canadian energy sector portfolio is driven by nonlinear negative tail asymmetric dependence during the global financial crisis and when the full sample period is employed. On the other hand, it displays nonlinear symmetric dependence during the oil price crisis, implying the need for close monitoring and rebalancing and a more continuous assessment of long investment positions. The US energy sector portfolio is driven by positive tail asymmetric dependence, and by symmetric dependence dynamics during crisis and non-crisis periods. |
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| Keywords: | Energy sectors Nonlinear dependence structure Portfolio optimization Tail dependence Vine copulas |
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