Conditional correlations in the returns on oil companies stock prices and their determinants |
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Authors: | Massimo Giovannini Margherita Grasso Alessandro Lanza Matteo Manera |
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Institution: | (1) Department of Economics, Boston College, Boston, USA;(2) Department of Economics, Bocconi University, Milan, Italy;(3) Eni S.p.A., Rome, Italy;(4) Fondazione Eni Enrico Mattei, Milan, Italy;(5) Department of Statistics, University of Milan-Bicocca, Via Bicocca degli Arcimboldi, 8, 20126 Milan, Italy |
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Abstract: | The identification of the forces that drive stock returns and the dynamics of their associated volatilities is a major concern in empirical economics and finance. This analysis is extremely important for determining optimal hedging strategies. This paper investigates the stock prices’ returns and their financial risk factors for several integrated oil companies, namely Bp (BP), Chevron-Texaco (CVX), Eni (ENI), Exxon-Mobil (XOM), Royal Dutch (RD) and Total-Fina Elf (TFE). We measure the actual co-risk in stock returns and their determinants “within” and “between” the different oil companies, using multivariate cointegration techniques in modelling the conditional mean, as well as multivariate GARCH models for the conditional variances. The distinguishing features of this paper are: (i) focus on the determinants of the market value of each company using the cointegrated VAR/VECM methodology; (ii) specification of the conditional variances of VECM residuals with the Constant Conditional Correlation (CCC) multivariate GARCH model of Bollerslev (1990) Review of Economics and Statistics 72:498–505] and the Dynamic Conditional Correlation (DCC) multivariate GARCH model of Engle (2002) Journal of Business and Economic Statistics 20:339–350]; (iii) discussion of the performance of optimal hedge ratios calculated with the DCC estimates. The “within” and “between” DCC indicate time-varying interdependence between stock return volatilities and their determinants. Moreover, DCC models are shown to produce more accurate hedging strategies. |
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Keywords: | Constant conditional correlations Dynamic conditional correlations Multivariate GARCH models Stock price indexes Brent oil prices Spot and futures prices Multivariate cointegration Hedge ratios |
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