Oil hedging with a multivariate semiparametric value-at-risk portfolio

This paper minimizes the risk of Brent oil in a multivariate portfolio, with three risk-minimizing goals: variance, parametric value-at-risk (VaR), and semiparametric value-at-risk. Brent oil is combined with five emerging ASEAN (Association of Southeast Asian Nations) stock indexes and five more developed non-ASEAN indexes. The preliminary dynamic equicorrelation estimates indicate that the ASEAN stock indexes are less integrated and thus potentially better for diversification purposes. The portfolio results show that the ASEAN indexes are better hedges for oil in terms of minimum variance and minimum VaR. However, although the ASEAN indexes have higher extreme risk, we find that a portfolio with these indexes has slightly lower modified VaR than a portfolio with the non-ASEAN indexes. The reason is probably the higher variance and higher equicorrelation of the non-ASEAN indexes, because these inputs affect the value of the modified downside risk of a portfolio. As a complementary analysis, we put a 50 percent constraint on Brent in the portfolios, and then the portfolios with the non-ASEAN indexes have better risk-minimizing results.