Portfolio Management Strategies Between Crude Oil Futures And China Sector-level Stocks

Volatility risk in the securities market has always been one of the most concerned topics by investors.In the last few years,both international crude oil future prices and China stock indices have been highly volatile.Moreover,time-varying fluctuations in crude oil markets are closely linked with those in China equity market.This article,beginning with the dynamic correlations between crude oil futures and stock markets,discusses the role played by international crude oil futures in managing the risk of China sector-level stock markets.With a corrected method,the article quantitatively analyzed the dynamic linkages between Brent crude oil future CFD prices and 14 SSE sector indices using weekly return data covering the period from 10 June 2012 to 29 December 2019.In the analyses,we have noted that most of former studies prefer DCC-GARCH model which requires that time series obey random-walk processes,while results from the R/S analysis and the modified R/S analysis show that all of the selected return series obey long-memory processes.As a consequence,we applied the fractional integration technique to deal with the return series instead of traditional techniques,and established 4 bivariate frameworks in the perspective of long-memory processes,namely DCC-FIGARCH,DCC-FIEGARCH,c DCC-FIGARCH and c DCC-FIEGARCH.Our overall evidence indicates that the dynamic co-movements between Brent oil futures and 12 sectors are significantly positive,which lays the groundwork for the oil-stock portfolio strategies;Further,the article tried to manage the portfolio risk between Brent oil futures and 12 SSE sectors,and also tried to measure the hedging effectiveness in all cases.The results reveal that the oil futures are useful instrument to minimize the risk in China equity market at the aggregate level,yet they perform heterogeneously at the sector level.Specifically,‘IT' sector and ‘Telecommunication Service' sector are better than the remaining sectors to be matched with oil assets.Meanwhile,the optimal portfolio weight strategy leads to considerable risk reduction rather than the optimal hedging ratio strategy,also DCC-FIEGARCH framework and c DCC-FIEGARCH framework estimate more precisely in most cases.Robust tests for the hedging effectiveness not only confirm our conclusions,but also show that the booming phase and the recessionary phase are superior to the recovering phase,likewise ICE is slightly inferior to MOEX in risk minimization.According to our findings,individual investors and investment managers are highly recommended to focus on portfolio formations for risk hedging in China equity market.Hence this article is essential for diversified portfolio structure and inter-market portfolio strategy in the theoritical perspective.Furthermore,we have also provided several implications as references for policy makers,in order to counter the risks in a internationalized stock market of our country and promote the development in a prosperous financial market of our nation.