Portfolio Diversification in Energy Markets Galvani, Valentina; Plourde, Andre

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Galvani, Valentina ; Plourde, Andre
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Energy Economics
Gasoline; Natural Gas; Securities trading
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.eneco.2009.05.015 Byline: Valentina Galvani, Andre Plourde Keywords: Portfolio diversification; Energy markets; Mean-variance spanning Abstract: This paper's results indicate that futures for crude oil, natural gas and unleaded gasoline fail to enhance the performance of representative energy stocks in terms of return to risk, but do decrease the overall level of risk exposure borne by passive equity investors. Our findings suggest that futures contracts on energy commodities are valuable to market participants with an interest in hedging against price fluctuations in energy markets by buy-and-hold strategies. However, this conclusion is reversed when one takes the perspective of traders whose core interests can be better approximated through the return to risk-bearing. In fact, this paper documents that return-to-risk maximizing agents are unlikely to profit from trading energy futures in addition to energy stocks. Moreover, futures for energy commodities fail to offer significant diversification gains with respect to energy stocks once investors adopt simple dynamic trading strategies that rely on readily available pricing information. Author Affiliation: Department of Economics at the University of Alberta, Edmonton, AB, Canada T6G 2H4 Article History: Received 21 August 2008; Revised 19 May 2009; Accepted 20 May 2009 Article Note: (footnote) [star] Our thanks to Aadm Sieminski for helping us identify sources for some of the data used in this paper, and to two anonymous referees for their useful comments.
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