Effect of oil price volatility on Tunisian stock market at sector-level and effectiveness of hedging strategy

In this work, our objective is to study in a first step links and interaction between oil and stock markets in Tunisia in terms of volatility at the sector-level, and then in a second step to determine the best hedging strategy for oilstock portfolio against the risk of negative variation in stock market prices. Our methodology consist to model the data by a bivariate GARCH model to capture the effect in terms of volatility in the variation of the oil price on the different sector index, and to use the conditional variances and conditional correlation to calculate the hedging ratio and determinate the best hedging strategy. The empirical results indicate that the majority of relationships are unidirectional from the oil market to Tunisian stock market, and the conditional variance of a stock sector returns is affected not only by the volatility surprises of the stock market, but also by those of oil market. The model GARCH-BEKK is more effective than the others versions to minimize the risk of oil-stock portfolio. (C) 2014 The Authors. Published by Elsevier B.V.