Hedging Effectiveness of Currency ETFs Against WTI Crude Oil Price Fluctuations

Abstract

In this study, hedging effectiveness of 10 currencies ETFs over the crude oil price fluctuations have been tested using symmetric and asymmetric dependence structure. We use ARMA-EGARCH model to obtain margins that are utilized in both static, and time-varying copulas to examine the static and time-varying dependence. Particularly, four static copulas (Student–t, Clayton, Frank, and Gumbel) and two time-varying copulas (Normal, and SJC) are used to explore both average and extreme dependence between 10 currency exchange-traded funds and the WTI crude oil. Our findings suggest that Invesco DB US Dollar Index Bullish fund (UUP) provides the strongest hedging effectiveness against crude oil price volatility both in average and extreme dependence scenarios. Whereas WisdomTree Bloomberg US Dollar Bullish Fund (USDU) and Invesco Currency Shares Japanese Yen Trust (FXY) appeared to behave as safe havens against crude oil prices as shown by significant extreme dependence parameters during bearish periods. Moreover, Invesco DB US Dollar Index Bearish Fund (UDN) is shown to be a good safe haven in the time of stress. Further, the remaining six ETFs are found to be positively linked with crude oil prices showing significant upper and lower tail dependence.