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Modeling Exchange Rate and Industrial Commodity Volatility Transmissions

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Author Info

  • Shawkat M. Hammoudeh

    (Lebow College of Business, Drexel University)

  • Yuan Yuan

    (Lebow College of Business, Drexel University)

  • Michael McAleer

    (School of Economics and Commerce, University of Western Australia)

Abstract

This paper examines the inclusion of the dollar/euro exchange rate together with important commodities in two different BEKK, or multivariate conditional covariance, models. Such inclusion increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities, as compared with their effects in the all-commodity basic model (Model 1), which includes the highly-traded aluminum, copper, gold and oil. Model 2, which includes copper, gold, oil and exchange rate, displays more direct and indirect transmission than does Model 3, which replaces the business cycle-sensitive copper with the highly energy-intensive aluminum. Optimal portfolios should have more Euro than commodities, and more copper and gold than oil. The multivariate conditional volatility models reveal greater volatility spillovers than their univariate counterparts.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0096.

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Length: 32 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:pad:wpaper:0096

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Keywords: multivariate GARCH; shocks; volatility; transmission; portfolio weights;

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Cited by:
  1. Todorova, Neda & Worthington, Andrew & Souček, Michael, 2014. "Realized volatility spillovers in the non-ferrous metal futures market," Resources Policy, Elsevier, vol. 39(C), pages 21-31.

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