Are oil and gas stocks from the Australian market riskier than coal and uranium stocks? Dependence risk analysis and portfolio optimization

a r t i c l e i n f o JEL classification: C1 C6 G1 Keywords: Energy stocks C-vines D-vines Dependence structure Risk measures Portfolio optimization This article models the dependence risk and resource allocation characteristics of two 20-stock coal–uranium and oil–gas sector portfolios from the Australian market in the context of the global financial crisis of 2008–2009. The modeling framework implemented consists of pair vine copulas and, linear and nonlinear portfolio optimization methods with respect to five risk measures. The paper's objectives are to find out if the oil and gas stocks are riskier than the coal and uranium stocks, to identify the optimization method and risk measure that produce the best risk-return trade-off, to recognize the stocks in which the optimal weight allocations converge on average, and to acknowledge the vine copula model that best accounts for the overall dependence of the energy portfolios. The research findings indicate that the oil stocks have higher dependence risk than the coal, uranium and gas stocks in financial crisis periods. The higher risk of the oil stocks is confirmed by the larger concentration of symmetric and asymmetric dependence they have in the negative tail. The canonical vine (c-vine) copula model is observed to better capture the overall dependence of the energy portfolios. The combination of a pair c-vine copula and nonlinear portfolio optimization produces the highest return relative to risk. The optimal weight allocations converge on average in some stocks. According to the Australian Bureau of Resources and Energy Economics in 2014 Australia was the ninth largest producer of energy worldwide. In the period 2011–2012 the country exported roughly 80% of the energy it produced, with coal, uranium and gas accounting for 60, 20 and 13% of the exports, respectively. As of December 2012 the percentages of mining (coal and uranium are included in this category) and energy (e.g. oil, gas and renewables) stocks listed on the Australian Securities Exchange (ASX) were approximately 39 and 9, an indication of the large size of the energy sector and the relationship of dependence the sector has with the economy (Arreola and Powell, 2013). Since the global financial crisis of 2008–2009 there has been a renewed interest in quantifying the dynamics of dependence and resource allocation characteristics of energy markets by applying new techniques for dependence estimation and portfolio optimization. This article models the dependence risk and resource allocation characteristics of two 20-stock …