Portfolio diversification in energy markets

• Published in: Energy economics Vol. 32; no. 2; pp. 257 - 268
• Main Authors: Galvani, Valentina, Plourde, André
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.03.2010; Elsevier; Elsevier Science Ltd
• Series: Energy Economics
• Subjects: Applied sciences; Commodities; Commodity futures; Diversification; Economic data; Energy; Energy economics; Energy industry; Energy market; Energy markets; Energy prices; Exact sciences and technology; Fossil fuels and derived products; Futures; Gas; General, economic and professional studies; Investment policy; Mean-variance spanning; Oil; Petroleum industry; Portfolio diversification; Portfolio diversification Energy markets Mean-variance spanning; Portfolio management; Risk exposure; Stock prices; Stocks; Studies; Variance; United States; North America; America; O13; G11; G32; Mean-variance spanning; M21; Energy markets; Portfolio diversification; Profitability; Econometric analysis; Energy economy; Diversification; Variance analysis; Petroleum; 013; Return on investment; Portfolio management; Natural gas; Time bargain; Unleaded gasoline; Investment
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2009.05.015

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.