Commodity Market Based Hedging against Stock Market Risk in Times of Financial Crisis: The Case of Crude Oil and Gold

Junttila, Juha-Pekka; Pesonen, Juho; Raatikainen, Juhani

doi:10.2139/ssrn.3024668

Cited by 39 publications

(56 citation statements)

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“…The findings of our study are supported by various other studies, including Junttila et al (2018) who also confirmed the change in correlation between sugar and crude oil from 2008 to 2020. Basak and Pavlova (2016) support our results as well and argue that enhanced financial speculation within commodity markets as well as increased overall financialization of the market poses a trigger for a change in correlation.…”

Section: Discussionsupporting

confidence: 91%

“…H 02 Throughout the whole period of 2006-2020, Brent crude oil prices did not influence the price of sugar. Raza et al (2016) and Junttila et al (2018) suggested that oil prices cannot provide a proper hedge against falling equity markets due to high correlation. The association between sugar and equity was tested during the outbreak of the financial crisis of 2007 as well as the outbreak of the coronavirus crisis in 2020.…”

Section: Introductionmentioning

confidence: 99%

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Sugar Futures as an Investment Alternative During Market Turmoil: Case Study of 2008 and 2020 Market Drop

Babirath¹,

Schmitl²,

Sahatqija

et al. 2020

Sugar Tech

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In times of turbulent financial markets, investors all around the globe seek for opportunities protecting their portfolios from devastating losses. Historically, commodities were regarded as a safe haven providing sound returns which offset potential losses arising from dropping equity prices in times of market turmoil. While sugar would have provided a proper hedge against crashing equity markets during the initiation of the 2007 bear market and the onset financial crisis, sugar prices dropped likewise equity during the outbreak of COVID-19 and the consequent market shock. The goal of the paper is to elaborate on the differences in sugar price dynamics during the aforementioned economic disruptions by employing a multiple linear regression approach using data from the last quarter 2007 as well as the first quarter of 2019. The findings suggest that the behavioral differences stem from the deep link between oil and sugar prices. While oil did not influence the price of sugar during the outbreak of the financial crisis, it had tremendous influence on sugar prices during the outbreak of the corona crisis. Currently, sugar provides a substantial upside for an investor's portfolio since the demand and supply-side shock on oil prices due to corona crisis as well as the Saudi-Russian oil price war drove oil prices and consequently sugar prices to a historic low. Sugar futures provide the advantage of offering a smaller contract size compared to oil futures, and even though both commodities trade in contango as of March 2020, the sugar future curve is by far not as steep as the oils. Resultingly, investors benefit from lower rollover costs while prospering from a potential surge in oil prices.

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Section: Discussionsupporting

confidence: 91%

Section: Introductionmentioning

confidence: 99%

Sugar Futures as an Investment Alternative During Market Turmoil: Case Study of 2008 and 2020 Market Drop

Babirath¹,

Schmitl²,

Sahatqija

et al. 2020

Sugar Tech

View full text Add to dashboard Cite

show abstract

“…They found large diversification benefits during large market downturns and emphasized that gold futures are the most attractive assets for reducing the risks of energy stocks. Junttila, Pesonen, and Raatikainen () examined the correlations between oil, gold, and energy sector stocks. They suggested that gold futures become widely regarded as a safe‐haven asset for energy sector equity investors, especially under adverse market circumstances.…”

Section: Introductionmentioning

confidence: 99%

Dynamic correlation and volatility spillovers across Chinese stock and commodity futures markets

Kang

Yoon

2019

Int. J Fin Econ

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This paper examines the return links and volatility transmission between Chinese stock and commodity futures markets and draws implications for portfolio risk management. To these ends, we consider three vector autoregression‐multivariate generalized autoregressive conditional heteroskedasticity‐class models with which to model volatilities and conditional correlations between Chinese stock and three commodity futures markets. Our empirical results reveal evidence of return linkage and volatility transmission between the Chinese stock and commodity futures markets. We also analyse optimal portfolio weights and hedging ratios between s1tock–commodity pairs. Finally, we assess implications for mixed commodity–stock portfolios and find strong evidence of hedging effectiveness and downside risk reductions.

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“…Gold, on the other hand, with the lowest volatility, is the leader of all precious metals. When stock market risks are considered, gold is known as a safe haven and used as an efficient hedge instrument (Junttila, Pesonen, & Raatikainen, ). As oil has been increasingly becoming financialized, whether gold does also function as an efficient hedge instrument against oil price risk is interest to financial industry.…”

Section: Introductionmentioning

confidence: 99%

On the time‐varying links between oil and gold: New insights from the rolling and recursive rolling approaches

Balcılar

Özdemir

Shahbaz³

2018

Int. J Fin Econ

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This study analyses the dynamic linkages between oil and gold prices for the spot and 1‐ to 12‐month futures markets using monthly data over the period 1983–2016. To do this, we use the rolling and recursive rolling Granger causality approaches. The distinguishing feature of this study from the previous studies is that this is the first study investigating the causal links between oil and gold using time‐varying causality tests. The findings show that the causality links between oil and gold display strong time variation. Although causal links are not detected for most of the study period, strong bidirectional or unidirectional causality is found in several subsamples. The duration of the periods with causality links varies from a few months to 3 years, whereas the duration for the noncausality periods might be 15 years long. By date stamping the causality links between oil and gold, our paper discovers that causality from oil to gold is related to large oil price changes, whereas causality from gold to oil is related to large financial crises. The evidence obtained in the paper points out the dangers of assuming a constant causality link between oil and gold markets because these links might break down unexpectedly. Our findings point out to the dangers of assuming noncausality between oil and gold particularly in hedging oil price risk using gold.

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Commodity Market Based Hedging against Stock Market Risk in Times of Financial Crisis: The Case of Crude Oil and Gold

Cited by 39 publications

References 0 publications

Sugar Futures as an Investment Alternative During Market Turmoil: Case Study of 2008 and 2020 Market Drop

Sugar Futures as an Investment Alternative During Market Turmoil: Case Study of 2008 and 2020 Market Drop

Dynamic correlation and volatility spillovers across Chinese stock and commodity futures markets

On the time‐varying links between oil and gold: New insights from the rolling and recursive rolling approaches

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