Optimal weights and hedge ratio behavior in Brent oil and Islamic Gulf stock markets

Salim Ben Sassi, Jihed Majdoub and Walid Mansour

Abstract

This paper examines the dynamics and spillover behavior between time-varying optimal weights and hedge ratios in order to analyze optimal volatility allocation spillover and characteristic structure.We estimate the vector autoregression moving-average-Baba–Engle–Kraft–Kroner-generalized autoregressive conditional heteroscedasticity model of Ling and McAleer based on weights and hedge ratios following the 2017 work of Majdoub and Ben Sassi. Optimal dynamic portfolio compositions are obtained from Brent oil and Gulf region stock markets estimations based on Kroner and Ng’s approach from 1998. The results reveal that our proposed time-varying weights and hedge ratios are dynamic, show active time-varying behavior and have a different performance than the mean value used in all previous studies in order to hedge different portfolios. Our findings are interesting for local and international portfolio holders wishing to more precisely forecast hedged portfolio composition and structure within the framework of international portfolio diversification.