Reducing natural gas risk through the creation of a bivariate portfolio

Papić Blagojević, Nataša and Kuzman, Boris and Subić, Jonel (2025) Reducing natural gas risk through the creation of a bivariate portfolio. Trendovi u poslovanju, 13 (1). pp. 137-145. ISSN 2334-816X

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Abstract

The subject of this research is the minimization of natural gas risk, a key global energy source that has experienced significant price fluctuations in recent years. This volatility exposes investors in gas to financial risk, and the goal is to reduce this risk by creating a bivariate portfolio using the Markowitz methodology. Gas is combined with four different auxiliary instruments: gold and wheat futures, as well as composite indices from the USA and China—the S&P 500 and SHCOMP. The constructed portfolio is referred to as the minimum variance portfolio, which has the lowest variance among all possible combinations of the two instruments. The analysis is based on eight years of daily data from January 2017 to December 2024, to identify the best auxiliary instrument that, when combined with gas, would result in the lowest risk. The results indicated that, among the four portfolios created, the combination with gold yielded the best outcomes. Additionally, the hedging efficiency index demonstrated that the portfolio with gold achieves the highest degree of gas risk reduction, at 98.55%. As far as we are aware, no previous research has examined the integration of these four assets with oil within a bivariate portfolio framework. This gap in the literature serves as the central rationale for conducting this study.

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