Oil as hedge, safe-haven, and diversifier for conventional currencies

Changyu Liu, Muhammad Abubakr Naeem, Mobeen Ur Rehman, Saqib Farid, Syed Jawad Hussain Shahzad

Research output: Contribution to journalArticlepeer-review

30 Citations (Scopus)

Abstract

The research investigates the safe-haven, hedging, and diversification function of crude oil for conventional currencies, among which five are major oil exporters, and six are major oil importers. In order to model time-varying dynamic correlations between crude oil and currencies, the study uses the Asymmetric-DCC model. The findings highlight low or negative correlations, especially during the crisis period. Next, we employ a quantile based regression framework and conclude distinct safe-haven and hedge functions of oil for major currencies. We provide additional evidence on the safe-haven, hedging, and diversification function of crude oil using the cross-quantilogram framework. The findings of out of sample analysis illustrate that the hedging effectiveness of oil is greater for oil-exporting countries. In addition, the conditional diversification benefit of oil is higher in the lower quantiles, i.e., when both foreign exchange and oil markets are in a bearish state. Finally, implications for investors, portfolio managers, and policymakers are further discussed.

Original languageEnglish
Article number4354
JournalEnergies
Volume13
Issue number17
DOIs
Publication statusPublished - Sept 2020
Externally publishedYes

Keywords

  • Crude oil
  • Currency
  • Hedge
  • Safe haven

ASJC Scopus subject areas

  • Renewable Energy, Sustainability and the Environment
  • Fuel Technology
  • Energy Engineering and Power Technology
  • Energy (miscellaneous)
  • Control and Optimization
  • Electrical and Electronic Engineering

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