Time lag dependence, cross-correlation and risk analysis of US energy and non-energy stock portfolios

This study estimates the time lag cross-correlation matrix, the Sharpe ratio and the Value-at-Risk (VaR) for three 36-stock energy, IT-computer and medicine-biotechnology sector portfolios derived from the US stock market during a post- global financial crisis period. We specifically look at the cause-effect dependence relationship, market risk and investment features of the sector portfolios. Our results uncover unidirectional time lag dependence between the IT-computer and medicine-biotechnology sector portfolios, stating that the price and return values of the former are dependent on the past price and return values of the latter. The IT-computer sector portfolio appears to be the best investment choice in terms of diversification, risk and return. Finally, the energy sector portfolio is found to have the highest VaR values and the lowest return relative to risk. The empirical results regarding the unveiled risk and dependence characteristics of the sectors are promising in terms of theory and practical financial applications.