The diminishing hedging role of crude oil: Evidence from time varying financialization

COVID-19 pandemic and financial innovations

“…The study places its contribution among previous studies that assess risk hedging potentials of various assets (Junttila et al 2018 ; Salisu et al 2020a , b ; Garcia-Jorcano and Muela 2020 ), and others that compared the hedging efficacies of assets (Salisu and Adediran 2019 ; Cheema et al 2020 ; Salisu et al 2020a , b ). The contribution becomes apparent since many traditional assets are increasingly being shown to be ineffective in their hedging roles in the face of recent realities (Sharma and Rodriguez 2019 ; Brim and Wenham 2019 ; Cheema et al 2020 ), thus, the need to consider financial innovations as possible alternative. The need to seek alternative hedging instruments in Exchange-traded funds (ETF) is further justified for a new type of market risk posed by the COVID-19 pandemic.…”

“…Similarly, literature have a number of evidence where some assets have been used to hedge against risk (Junttila et al 2018 ; Salisu et al 2020a , b ; Garcia-Jorcano and Muela 2020 ), and in some cases, where hedging efficacy of one asset have been tested against another (Salisu and Adediran 2019 ; Cheema et al 2020 ; Salisu et al 2020a , b among others). However, some of these traditional assets have been ineffective in their hedging role (Sharma and Rodriguez 2019 ; Brim and Wenham 2019 ; Cheema et al 2020 ), thus, the need to consider other alternatives that can effectively hedge against risk associated with pandemics, hence, our consideration for financial innovations. Similarly, there are plethora of evidence that financial innovations have imbedded in them, a number of new prospects including incentives as related to stock market (Chen 1995 ; Partnoy and Thomas 2007 ; Chou 2007 ; Beck et al 2016 ).…”

“…One of our strongest motivations for pursuing this contribution is the support from previous studies that reveal the negative impact of the COVID-19 pandemic on financial markets (Ashraf 2020 ; Baker et al 2020a , b ; Bouri et al 2021 ; Corbet et al 2020 ; Gherghina et al 2020 ; Ngwakwe 2020 ; Salisu et al 2020a , b ; Schoenfeld 2020 ; Sharif et al 2020 ; Hong et al 2021 ; Insaidoo et al 2021 ; Li et al 2021 ; Mazur et al 2021 ; Gao et al 2022 ). The second motivation is about the choice of financial innovation as an alternative hedging instrument due to previous findings indicating that traditional instruments have been failing in their hedging role 2 (Sharma and Rodriguez 2019 ; Brim and Wenham 2019 ; Cheema et al 2020 ). Unlike many other conventional investment options, ETFs offer passive and flexible investment strategies that allow investors to hold diversified basket of securities as a single stock rather than separately (Kraft 2012 , Dannhauser 2017 ; Marskz and Lechman 2018 ; Sarkarya and Ekinci 2020 ; Naeem et al 2020 ; Ozdurak and Ulusoy 2020 ; Liu et al 2020 ; Sakarya and Ekinci 2020 ).…”

Can Crude Oil Futures Be the Good Hedging Tool for Tyre Equities? Evidence From India

“…Cifarelli and Paladino (2015); Kim and Park (2016) uses bivariate GARCH models to estimate the time-varying conditional correlation. Sharma and Rodriguez (2019) have used the DCC GARCH model to analyse the hedging role of crude oil in the equity market of the United States. The asymmetric Power Arch (APARCH) model was adopted by Bagchi (2017) to analyse the relationship between crude oil price volatility and BSE Sensex.…”

Portfolio diversification impact of oil and asymmetric interaction between oil, equity and bonds in the global market: fresh evidence from alternative approaches

“…There have been several studies on the benefits of adding oil into a portfolio of stocks and bonds, such as that of Dorsman et al (2013) which have shown that it improves the portfolio's return. However, other studies such as Sharma and Rodriguez (2019) have demonstrated that such portfolios have not been profitable. The differences in results between these studies could have been due to the differences in time period and the techniques used.…”