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• W1488852714 abstract "ABSTRACT This paper investigates the link between commodity (gold and oil) prices and the returns and risk reactions of commodity linked-equity during a geopolitical event. In the short run, while the returns of gold and oil commodities increase by 8. Ol % and 4.2 7% respectively at the first trading day after 9/11 event, the gold equities realize negative returns, and oil equities stayed relatively unaffected. This shows a broken link between the returns of underlying commodities and the equities of commodity producing firms during a geopolitical risk event. In addition, we found that the 9/11 event increase systematic risk levels in both gold and oil industries. INTRODUCTION Alternative investments provide active portfolio managers an opportunity to reduce the standard deviations of their traditional bond-stock portfolios. Among the alternative investments, gold and oil commodities are special since they have low betas and correlations with the rest of the economy. Therefore, it is tempting for any portfolio manager to include gold and oil investments in their portfolios. However, a cautionary approach might be needed since gold and oil investments are highly sensitive to geopolitical risks. Lately, the geopolitical risk component of market risk might be on the rise due to increasing terrorism activities around the world. Therefore, active portfolio managers can reduce the negative effects of geopolitical risk on the value of their portfolios during heightened geopolitical risk periods/events by rebalancing their portfolios away from geopolitical risk sensitive industries. Diversifying traditional bond-stock portfolios through alternative investments is not a new phenomenon. For example, Healey and Hardy (1997) documents the institutional investors' increasing appetite towards alternative investments including gold and oil stocks. In addition, Akey (2005) claims that active management in commodities may provide investors with an opportunity to earn returns superior to those of passive commodity indexes. Akey also points out to the increasing interest in commodities by the investors at a point that now we might consider commodities as an asset class itself. Campbell (2005) sees structured products referenced to commodities, especially oil and gold, as viable investment alternatives to increase diversification. Furthermore, Solnik (2000) outlines three direct ways to invest into commodities as through; (i) futures contracts, (ii) bonds indexed on some commodity price, and (iii) stocks of companies producing commodity. Our paper focuses the third way as outlined by Solnik; investing into the stocks of gold and oil companies that produce gold and oil commodities. The link between gold and oil prices and the stocks of gold and oil producing firms is expected to be positively correlated. However, investing in commodities directly through futures contracts versus through commodity-linked equities are not the same. This link between commodity prices and the value of commodity linked-equity is severed by the dynamics of production process where other factors might affect commodity producing firm value. El-Sharif et al. (2005) investigates the link of crude oil prices and oil producing firm equities and finds a significant positive relationship and concludes that the volatility of crude oil prices being reflected into stock value of oil firms. In contrast, Simmons (2005) argues that the correlation of equity-linked security returns and the returns from the underlying commodity prices are not too high to make an investment in equity-linked securities. Simmons sees investing in commodities directly through futures contracts as a better way of investing. Gold Commodity and Gold Stocks Blose (1996) sees investing in gold as hedging against inflation, political risk, and currency exchange risk. There is no clear consensus on the effect of gold price over the value of gold producing (mining) firm stocks. …" @default.
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• W1488852714 date "2008-05-01" @default.
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• W1488852714 title "The Link between Commodity Prices and Commodity-Linked-Equity Values during a Geopolitical Event" @default.
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