Conditional correlations in the return on oil companies stock prices and their determinants

Massimo Giovannini, Matteo Manera, Alessandro Lanza, Margherite Grasso

Risultato della ricerca: Contributo in rivistaArticolo in rivista

8 Citazioni (Scopus)

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.
Lingua originaleEnglish
pagine (da-a)193-207
Numero di pagine15
RivistaEmpirica
Volume2006
Stato di pubblicazionePubblicato - 2006

Keywords

  • Brent oil prices
  • Constant conditional correlations
  • Dynamic conditional correlations
  • Hedge ratios
  • Multivariate GARCH models
  • Multivariate cointegration
  • Spot and futures prices
  • Stock price indexes

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