Time-Varying Co-movements between Wti and European Capital Markets: Implications for Portfolio Diversification and Hedging Strategies

Mariana Chambino – School of Business and Administration, Polytechnic Institute of Setúbal, Portugal

Rui Dias – School of Business and Administration, Polytechnic Institute of Setúbal, Portugal; Center for Studies and Advanced Training in Management and Economics (CEFAGE), University of Évora, Portugal

Nicole Horta – School of Business and Administration, Polytechnic Institute of Setúbal, Portugal

Abstract

This paper aims to analyse whether the events of 2020 and 2022 (Covid-19 pandemic crisis, the oil price war between Russia and Sau­di Arabia, and the Russian invasion of Ukraine in 2022) affected efficien­cy, and accentuated shocks across markets in the Netherlands (AEX), Bel­gium (BEL 20), France (CAC 40), Portugal (PSI 20), Norway (OBX), and in the West Texas Intermediate (WTI) oil index, during the period from Sep­tember 18th, 2017, to 15th, September 2022. The findings reveal that mar­kets exhibit more substantial signals of (in)efficiency throughout the glob­al economy’s uncertainty sub-period; nonetheless, we find that the shocks across markets did not increase from the Tranquil sub-period to the Stress sub-period. Furthermore, we also find that WTI lacks the hedging and ha­ven features exhibited by the European capital markets studied. These findings have significant consequences, especially for overseas investors and oil corporations, which try to spread risk, particularly during uncer­tain times. Finally, we demonstrate that there is no evidence that market (in)efficiency increases the co-movements.

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