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Volatility persistence in metal returns: A FIGARCH approach

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  • Cochran, Steven J.
  • Mansur, Iqbal
  • Odusami, Babatunde
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    Abstract

    This study examines the returns and the long-memory properties of the return volatilities of four metals – copper, gold, platinum, and silver. Daily returns for the January 4, 1999 to March 10, 2009 period are used. Three key issues are addressed: (1) whether the volatility processes exhibit long-run temporal dependence; (2) whether the returns and conditional volatility of returns are affected by the uncertainty brought about by the financial crisis in September 2008; and (3) whether the implied volatility in the equity market, as measured by VIX, plays a significant role in determining metal risk and return. The results show that VIX is important in the determination of metal returns and return volatility. The findings suggest that metal and equity returns are influenced by a common risk factor and failure to explicitly model this factor will yield less than optimal portfolio diversification. Events during the post-September 1, 2008 period contributed to increased return volatility for several of the metals. The interaction effect of VIX and a financial crisis dummy variable is also found to be significant. The results strongly suggest that VIX should be considered in any future modeling of metal returns and return volatility. FIGARCH (1,d,1) appropriately describes the volatility processes as all long-memory parameters are statistically significant.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 64 (2012)
    Issue (Month): 4 ()
    Pages: 287-305

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    Handle: RePEc:eee:jebusi:v:64:y:2012:i:4:p:287-305

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    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Metal returns volatility; Volatility persistence; FIGARCH; Financialization;

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    Cited by:
    1. repec:ipg:wpaper:9 is not listed on IDEAS
    2. Chkili, Walid & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2014. "Volatility forecasting and risk management for commodity markets in the presence of asymmetry and long memory," Energy Economics, Elsevier, vol. 41(C), pages 1-18.
    3. repec:ipg:wpaper:201409 is not listed on IDEAS
    4. Sinha, Pankaj & Mathur, Kritika, 2013. "A study on the Price Behavior of Base Metals traded in India," MPRA Paper 47028, University Library of Munich, Germany.
    5. Sensoy, Ahmet, 2013. "Dynamic relationship between precious metals," Resources Policy, Elsevier, vol. 38(4), pages 504-511.
    6. Walid Chkili & Shawkat Hammoudeh & Duc Khuong Nguyen, 2013. "Long memory and asymmetry in the volatility of commodity markets and Basel Accord: choosing between models," Working Papers 2013-009, Department of Research, Ipag Business School.

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