Hedging Effectiveness of Commodities in the Stock Portfolio: Empirical Evidence from Pakistan Stock Exchange using Multivariate GARCH Models
This study explores the hedging effectiveness of oil and gold assets in Pakistani stock market. We incorporate three multivariate GARCH models for hedging potential of oil and gold assets in stock market of Pakistan. The DCC model is found fitted among others for empirical analysis. The empirical results indicate that the asymmetric effect is positive (negative) providing that negative shocks tend to increase (decrease) volatility in future more than positive shocks of the same magnitude for stock market and oil (gold). During the Global Financial Crisis 2007-2009, the study finds a positive trend in correlations between oil-stock pair suggesting a lack of portfolio diversi cation bene t of oil when added in stock portfolio. However, a more prominent negative trend in correlations between gold-stock pair shows that gold proves a potential safe haven asset for stocks in Pakistan. The results also reveal that investors must adjust their hedging position in oil and gold assets for their portfolio of stocks across the study period, as the optimal hedge ratios for stock-oil/gold pairs are dynamic in nature. Overall, the average negative values of hedging efffectiveness indicate that unhedged portfolio performs better than the hedged ones. These results contain implications for different stakeholders including policymakers, portfolio managers, domestic and international investors.