The effect of oil price risk exposure and hedging to Asia-Pacific airline firms stock returns: evidence from static and quantile panel regressions / Scott Barnabas Felix

Airline equity has been a popular part of investors and fund managers’ investment portfolio due to significant important of the industry to trade and financial markets. In this context, oil price risk has been acknowledged as a crucial risk factor to an airline equity portfolio. In this regard, the industry needs alternative hedging mechanism as a risk management in portfolio equity investment to guard them against constant volatility in the global oil markets. The research investigates this issue in the context of hedgingstock returns research landscape with two components. First, this research examines the effect of oil price risk exposure to the Asia-Pacific airlines firm stock returns. Second, this research investigates the role of different futures hedging instruments, namely own commodity hedging (oil futures) and cross-commodity hedging (gold futures, and VIX futures) and the effect of net hedging benefits by employing them on oil price risk exposure to Asia-Pacific airline firms’ stock returns using the hedging-stock pricing model. This research examines 22 listed Asia-Pacific airline firms’ stock returns behaviour with monthly frequency data from 2010 to 2019. A complementary analysis approach using the fixed effect panel and quantile regressions are used to analyse the research model. The findings confirm the negative effects of oil price risk and the benefits of hedging oil price risk on airline stock returns, and the superiority of gold futures over oil futures and VIX futures as effective hedging instruments. In investment practice, the result suggests that pairing of gold futures-airline stock produce an effective hedge in all market conditions (i.e., higher, median, lower oil price performances). The present research contributes to the extension of body of knowledge related to oil price-stock returns-hedging research and draw new insights on ways to manage the effect of oil price risk on airline stock returns through cross-commodities hedging instruments and analysis in quantiles perspectives to account for asymmetries that would be valuable to inform theory, practice, as well as policy.