Frequency spillovers, connectedness, and the hedging effectiveness of oil and gold for US sector ETFs

This study uses time-frequency analysis to examine directional connectedness between US sector equity ETFs, oil, gold, stock market, and uncertainty factors over the short and long terms. Frequency-based spillover index and portfolio hedging methods are applied to develop the empirical results. In analysing directional connectedness, we find that the market's 30-day forward looking expectations of US stock market volatility (VIX) has the strongest effect on the US sector equity ETFs in both the short and long runs. This is followed by the 30-day forward looking expectations of oil price volatility (OVX). Of the uncertainty factors, US economic policy uncertainty has the smallest impact on sector ETFs. Oil has a stronger effect on sector ETFs than gold in the short and long runs. Spillovers between the sector ETFs, gold, oil, and uncertainty factors, are asymmetric for both short and long runs, stronger in the short term, and noticeably increase in times of financial turmoil and economic uncertainty. Portfolio hedging results show that oil is the most effective hedge for each sector ETF in both the short term and the long term. The highest hedging effectiveness is observed for the Consumer Staples ETF. (c) 2021 Elsevier B.V. All rights reserved.