COVID-19 and time-frequency spillovers between oil and sectoral stocks and portfolio implications: Evidence from China and US economies

The ongoing COVID-19 pandemic has resulted in over 603,164,436 confirmed cases and 6,482,338 deaths as of 7th September 2022. The damages of COVID-19 on the performance of stock and crude oil commodity markets are more pronounced than during the times of global financial crisis (GFC) in 2008 (Jebabli et al., 2021; Zhang and Hamori, 2021). The rapid spread of COVID-19 pandemic and its variants (from Delta to Omicron) brought government to undertake restrictive and precautionary measures (e.g., lockdown, social distancing, travel restrictions, reduction and stoppages of operational activities, and import/export disruption). These costly measures have intensified the uncertainty in financial and energy markets, increasing the uncertainty on these markets. In addition to the effects of COVID-19 pandemic, the Russia-Saudi Arabia oil price war has amplified the high uncertainty in oil market (Ma et al., 2021). This research proposal will examine the impacts of COVID-19 on the frequency dynamics co-movements between oil and both US and Chinese stock sectors. Relying on frequency factor is important to understand the relationships between oil and stock markets sectors at short-, intermediate-, and long-terms. Institutional investors (hedge funds, mutual funds) are interested in the long-term oil-stock co-movements whereas retail investors (hedgers and speculators) focus on the short-term oil-stock co-movements. The wavelet approach is a suitable method to account for the heterogeneity of market participants. We notice that U.S. and China have the two largest stock markets in the world. The investment in Chinese stock market is risky and characterized by high volatility and low returns (Su and Fleisher, 1998). Besides, the Chinese and U.S. stock markets have suffered, in the last decade, from successive crashes where the trade tension between US and China and has been amplified especially during the COVID-19 outbreak. Second, it will investigate the bidirectional shocks and volatility transmission between oil and sectors before and during the COVID-19 using the asymmetric BEKK-GARCH (1,1) model. Third, this study will focus on oil-stock nexus not only at aggregate level but also at sectoral level. In fact, the effects of oil prices on industry sector performance depends on its dependence on oil market (Mensi et al., 2021a). Finally, this study will analyze the hedging strategy and effectiveness of a mixed portfolio composed by crude oil futures and sectors before and during the pandemic. Specifically, we follow Kroner and Ng (1993) to describe the optimal oil proportion invested in an oil-stock portfolio. Besides, we analyze the hedge cost by Kroner and Sultan (1993) and hedging effectiveness using the methodology by Ku et al. (2007). This study is expected to offer practical implications to investors, portfolio managers as well as policy makers. This project will be informative for policymakers to enhance the development of stock markets.