The diminishing hedging role of crude oil: Evidence from time varying financialization

Using daily data from 1999 to 2019, we document a diminishing hedging role that crude oil plays for the stock market as a result of growing financialization. With interest rates driven near zero after the crisis of 2007-2009 and the extreme volatility of oil prices, vector autoregressions (VARs) suggest larger roles of oil prices in explaining stock returns during the 2007-2009 crisis and afterwards. We also find increased co-movement between stock and oil during the post-crisis period. Our results indicate that more short positions in crude oil are required to hedge long positions in equity markets during the post-crisis period, i.e., it costs more to use crude oil investments as a hedging tool compared to pre-crisis period. Therefore, investors holding a mixed portfolio of stocks and oil enjoy lower diversification benefits. (C) 2019 Elsevier B.V. All rights reserved.