TY - JOUR
T1 - Conditional correlations in the return on oil companies stock prices and their determinants
AU - Manera, Matteo
AU - Lanza, Alessandro
AU - Giovannini, Massimo
AU - Grasso, Margherite
PY - 2006
Y1 - 2006
N2 - 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.
AB - 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.
KW - Brent oil prices
KW - Constant conditional correlations
KW - Dynamic conditional correlations
KW - Hedge ratios
KW - Multivariate GARCH models
KW - Multivariate cointegration
KW - Spot and futures prices
KW - Stock price indexes
KW - Brent oil prices
KW - Constant conditional correlations
KW - Dynamic conditional correlations
KW - Hedge ratios
KW - Multivariate GARCH models
KW - Multivariate cointegration
KW - Spot and futures prices
KW - Stock price indexes
UR - http://hdl.handle.net/10807/32056
M3 - Article
VL - 2006
SP - 193
EP - 207
JO - Empirica
JF - Empirica
SN - 0340-8744
ER -