Financialization, Crisis and Commodity Correlation Dynamics
AbstractWe study bi-variate conditional volatility and correlation dynamics for individual commodity futures and financial assets from May 1990-July 2009 using DSTCC-GARCH (Silvennoinen and Terasvirta 2009). These models allow correlation to vary smoothly between extreme states via transition functions driven by indicators of market conditions. Expected stock volatility and money manager open interest in futures markets are relevant transition variables. Results point to increasing integration between commodities and financial markets. Higher commodity returns volatility is predicted by lower interest rates and corporate bond spreads, US dollar depreciations, higher expected stock volatility and financial traders open positions. We observe higher and more variable correlations between commodity futures and financial asset returns, particularly from mid-sample, often predicted by higher expected stock volatility. For many pairings, we observe a structural break in the conditional correlation processes from the late 1990s.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 267.
Date of creation: 01 Jan 2010
Date of revision:
commodity futures; double smooth transition; conditional correlation; financialization;
Other versions of this item:
- 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.
- G01 - Financial Economics - - General - - - Financial Crises
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-27 (All new papers)
- NEP-BEC-2010-02-27 (Business Economics)
- NEP-FMK-2010-02-27 (Financial Markets)
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