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Byline: Valentina Galvani, Andre Plourde
Portfolio diversification; Energy markets; Mean-variance spanning
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.
Department of Economics at the University of Alberta, Edmonton, AB,
Canada T6G 2H4
Received 21 August 2008; Revised 19 May 2009; Accepted 20 May 2009
(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.