Title: Copula model dependency between oil prices and stock markets: evidence from Tunisia and Egypt

Authors: Wajdi Hamma; Ahmed Ghorbel; Anis Jarboui

Addresses: Faculty of Economics and Management Sciences, LARTIGE Laboratory, Finance and Accounting Department, Road of the Airport 4, 3018 Sfax, Tunisia ' CODECI Laboratory, Faculty of Economics and Management Sciences, Quantitative Methods Department, Road of the Airport 4, 3018 Sfax, Tunisia ' Higher School of Business Administration, Department of Management, University of Sfax, Road of the Airport 4, 3018 Sfax, Tunisia

Abstract: In this work, our objective is to study in a first step the relationships between oil price and stock market indices in Tunisia and Egypt using copulas, and then in a second step to analyse the optimal weights and hedge ratio for building optimal portfolios to minimise the exposure to risk from oil price changes. The model is implemented with an ARMA-GARCH-GPD using daily observations for the 2 January 1998 to 31 December 2013 period for the marginal distribution and the extreme value copula for the joint distribution, which allows taking into account non-linear dependence, tails behaviour and their development over time. Various copula functions are used to model the dependence structure between oil prices and stock markets of Tunisia and Egypt. Empirical results provide evidence of significant and symmetric tail dependence for international oil prices and stock markets. On the other hand, volatility for this stock markets registered record levels due to the increase of the degree of oil prices. However, dependence structure changed over time, indicating that hedging effectiveness and hedge ratio for the oil asset in the hedged portfolios varied over time.

Keywords: dependence structure; stock market; oil prices; copulas; hedging strategy.

DOI: 10.1504/AJFA.2018.090370

American Journal of Finance and Accounting, 2018 Vol.5 No.2, pp.111 - 150

Received: 26 May 2017
Accepted: 05 Aug 2017

Published online: 13 Mar 2018 *

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