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Fair-weather Friends? Sector-specific volatility connectedness and transmission

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  • Liu, Pan
  • Power, Gabriel J.
  • Vedenov, Dmitry

Abstract

Investment portfolio performance can improve with the addition of alternative assets such as commodities or by using styles such as sector investing. How volatility is transmitted between individual commodities and specific industry sectors, however, is not well understood. The dynamics of volatility transmission matters for risk management and asset allocation, given increases in commodity-equity correlations. We investigate the dynamics of volatility transmission and connectedness over 1/1999-12/2016 using data on futures for crude oil, gold, copper and corn as well as six industry SPDRs (Standard and Poor's Depository Receipts). We find that Financials and Technology are consistently the strongest volatility transmitters, while Consumer Durables and commodities are usually net receivers. Gold and corn appear to be more insulated from volatility transmission. All sectors and assets show time variation in net volatility transmission. Most sectors and indexes show reversals of net volatility transmission during market downturns or financial crises.

Suggested Citation

  • Liu, Pan & Power, Gabriel J. & Vedenov, Dmitry, 2021. "Fair-weather Friends? Sector-specific volatility connectedness and transmission," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 712-736.
    • Handle: RePEc:eee:reveco:v:76:y:2021:i:c:p:712-736
    DOI: 10.1016/j.iref.2021.06.004
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