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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 2000-2011. 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

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44395.

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Date of creation: 15 Feb 2013
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Handle: RePEc:pra:mprapa:44395

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

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Cited by:
  1. Aboura, Sofiane & Chevallier, Julien, 2014. "Volatility equicorrelation: A cross-market perspective," Economics Letters, Elsevier, vol. 122(2), pages 289-295.

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