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Financial Crises, Financialization of Commodity Markets and Correlation of Agricultural Commodity Index with Precious Metal Index and S&P500

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Author Info

  • M.Fatih Oztek

    ()
    (Department of Economics, METU)

  • Nadir Ocal

    ()
    (Department of Economics, METU)

Abstract

This paper tests and models time varying correlations among agricultural commodity, precious metal and S&P500 indices to uncover whether rising trend among these markets is a result of financialization of commodity markets and/or financial crisis. We particularly investigate the roles of market news, global and market volatility on the nature and dynamics of the correlation. Empirical results show that high volatility during financial crisis is the main source of high correlation of agricultural commodity index with S&P500 and precious metal index, and plays crucial role in correlation between precious metal index and S&P500, possibly due to increasing engagement of financial market investors in commodity markets during financial crisis. Hence, heterogeneous structure of commodity markets delivers better portfolio diversification opportunities during calm periods compared to turmoil periods of financial crisis.

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File URL: http://www.erc.metu.edu.tr/menu/series13/1302.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by ERC - Economic Research Center, Middle East Technical University in its series ERC Working Papers with number 1302.

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Length: 20 pages
Date of creation: Feb 2013
Date of revision: Feb 2013
Handle: RePEc:met:wpaper:1302

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Related research

Keywords: Multivariate GARCH; Smooth Transition Conditional Correlation; Portfolio Diversification; Financialization of Commodity Markets; Index Investment and Equity-Commodity Co-movements.;

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  1. AfDB AfDB, . "AfDB Group Annual Report 2007," Annual Report, African Development Bank, number 63 edited by Koua Louis Kouakou, 3.
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  3. Silvennoinen, Annastiina & Teräsvirta, Timo, 2005. "Multivariate Autoregressive Conditional Heteroskedasticity with Smooth Transitions in Conditional Correlations," Working Paper Series in Economics and Finance 577, Stockholm School of Economics, revised 01 Oct 2005.
  4. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  5. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  6. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  7. Annastiina Silvennoinen & Timo Teräsvirta, 2008. "Modelling Multivariate Autoregressive Conditional Heteroskedasticity with the Double Smooth Transition Conditional Correlation GARCH Model," CREATES Research Papers 2008-05, School of Economics and Management, University of Aarhus.
  8. Oecd, 2008. "RFID Guidance and Reports," OECD Digital Economy Papers 150, OECD Publishing.
  9. Silvennoinen, Annastiina & Thorp, Susan, 2013. "Financialization, crisis and commodity correlation dynamics," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 42-65.
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