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Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold

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  • Mensi, Walid
  • Beljid, Makram
  • Boubaker, Adel
  • Managi, Shunsuke

Abstract

This paper employs a VAR-GARCH model to investigate the return links and volatility transmission between the S&P 500 and commodity price indices for energy, food, gold and beverages over the turbulent period from 2000 to 2011. Understanding the price behavior of commodity prices and the volatility transmission mechanism between these markets and the stock exchanges are crucial for each participant, including governments, traders, portfolio managers, consumers, and producers. For return and volatility spillover, the results show significant transmission among the S&P 500 and commodity markets. The past shocks and volatility of the S&P 500 strongly influenced the oil and gold markets. This study finds that the highest conditional correlations are between the S&P 500 and gold index and the S&P 500 and WTI index. We also analyze the optimal weights and hedge ratios for commodities/S&P 500 portfolio holdings using the estimates for each index. Overall, our findings illustrate several important implications for portfolio hedgers for making optimal portfolio allocations, engaging in risk management and forecasting future volatility in equity and commodity markets.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 15-22

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Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:15-22

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Stock markets; Commodity prices; Volatility spillovers; Hedge ratios; VAR-GARCH models; Energy price;

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Citations

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Cited by:
  1. Aboura, Sofiane & Chevallier, Julien, 2014. "Volatility returns with vengeance: Financial markets vs. commodities," Economics Papers from University Paris Dauphine 123456789/13359, Paris Dauphine University.
  2. Walid Mensi & Shawkat Hammoudeh & Duc Khuong Nguyen & Seong-Min Yoon, 2014. "Dynamic spillovers among major energy and cereal commodity prices," Working Papers 2014-160, Department of Research, Ipag Business School.
  3. Grosche, Stephanie & Heckelei, Thomas, 2014. "Directional Volatility Spillovers between Agricultural, Crude Oil, Real Estate and other Financial Markets," Discussion Papers, University of Bonn, Institute for Food and Resource Economics 166079, University of Bonn, Institute for Food and Resource Economics.
  4. Aboura, Sofiane & Chevallier, Julien, 2014. "Volatility equicorrelation: A cross-market perspective," Economics Letters, Elsevier, Elsevier, vol. 122(2), pages 289-295.
  5. Shawkat Hammoudeh & Duc Khuong Nguyen & Juan Carlos Reboredo & Xiaoqian Wen, 2014. "Dependence of stock and commodity futures markets in China: implications for portfolio investment," Working Papers 2014-561, Department of Research, Ipag Business School.
  6. Sofiane Aboura & Julien Chevallier, 2014. "Cross-Market Spillovers with 'Volatility Surprise'," Working Papers halshs-01052488, HAL.
  7. Wanat, Stanisław & Papież, Monika & Śmiech, Sławomir, 2014. "Causality in distribution between European stock markets and commodity prices: Using independence test based on the empirical copula," MPRA Paper 57706, University Library of Munich, Germany.
  8. Sofiane Aboura & Julien Chevallier, 2014. "Cross-Market Spillovers with Volatility Surprise," Working Papers 2014-469, Department of Research, Ipag Business School.
  9. Ikram Jebabli & Mohamed Arouri & Frédéric Teulon, 2014. "On the effects of world stock market and oil price shocks on food prices: An empirical investigation based on TVPVAR models with stochastic volatility," Working Papers 2014-209, Department of Research, Ipag Business School.
  10. Walid Chkili & Chaker Aloui & Duc Khuong Nguyen, 2014. "Instabilities in the relationships and hedging strategies between crude oil and US stock markets: do long memory and asymmetry matter?," Working Papers 2014-549, Department of Research, Ipag Business School.
  11. Grosche, Stephanie & Heckelei, Thomas, 2014. "Price dynamics and financialization effects in corn futures markets with heterogeneous traders," Discussion Papers, University of Bonn, Institute for Food and Resource Economics 172077, University of Bonn, Institute for Food and Resource Economics.
  12. Algieri, Bernardina, 2014. "The influence of biofuels, economic and financial factors on daily returns of commodity futures prices," Discussion Papers, University of Bonn, Center for Development Research (ZEF) 164963, University of Bonn, Center for Development Research (ZEF).
  13. Amine Lahiani & Duc Khuong Nguyen & Thierry Vo, 2014. "Understanding return and volatility spillovers among major agricultural commodities," Working Papers 2014-243, Department of Research, Ipag Business School.
  14. Sensoy, Ahmet, 2013. "Dynamic relationship between precious metals," Resources Policy, Elsevier, Elsevier, vol. 38(4), pages 504-511.
  15. Jozef Barunik & Evzen Kocenda & Lukas Vacha, 2014. "How does bad and good volatility spill over across petroleum markets?," Papers 1405.2445, arXiv.org.

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