Modeling The Asymmetric Dynamics Of Financial Assets: Insights Into Hedging, Safe Hayen And Portfolio Diversification Strategies

Abstract

This thesis examines the dynamic dependence, hedging effectiveness, safe haven and portfolio diversification benefits of bonds, crude oil, gold and VIX futures for global stock markets including G-12 countries, selected Eurozone, regional world Islamic and conventional stock markets. The daily data spans from January I, 1991 to December 31, 2015. The DCC, ADCC and GO-GARCH techniques are used to model the volatilities and conditional correlations. The rolling window estimation technique is employed to construct an out-of-sample one-step-ahead forecast of the dynamic conditional correlations and the optimal hedge ratios. However, the wavelet coherence (WTC) approach is utilized to detect the cross-asset contagion and thereafter determine the safe haven dynamics of alternative assets in the time-frequency domain. Findings of the thesis reveal that negative shocks have more pronounced effects in comparison to positive shocks. That pushes investors to seek refuge in safe haven assets in order to safeguard their investments from extreme negative shocks. For most of the situations studied, the volatility index (VIX) provides the best and effective hedge to stock returns and the national benchmark bond indices provide the second best hedge.