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Dynamic spillover effects among crude oil, precious metal, and agricultural commodity futures markets

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  • Kang, Sang Hoon
  • McIver, Ron
  • Yoon, Seong-Min

Abstract

This paper examines spillover effects among six commodity futures markets – gold, silver, West Texas Intermediate crude oil, corn, wheat, and rice – by employing the multivariate DECO-GARCH model and the spillover index. Specifically, we investigate the dynamics of return and volatility spillover indices to reveal the intensity and direction of transmission during the recent global financial and European sovereign debt crises. Our empirical results are as follows. First, we estimate a positive equicorrelation between commodity futures market returns and find that it increased sharply during the crises. This effect can persist during periods of economic and financial turmoil, diminishing the benefits of international portfolio diversification for investors. Second, we identify bidirectional return and volatility spillovers across commodity futures markets, and find more pronounced trends in their levels in the post-crisis period. This indicates the strong impact of spillovers during crisis periods. Third, both gold and silver are information transmitters to other commodity futures markets, while the remaining four commodity futures investigated were receivers of spillovers during recent periods of financial stress. Finally, we analyse the optimal portfolio weights and time-varying hedge ratios between metal and other commodities futures markets. Overall, our findings provide new insights into channels of information transmission, which may improve investment decisions and inform portfolio investors' trading strategies.

Suggested Citation

  • Kang, Sang Hoon & McIver, Ron & Yoon, Seong-Min, 2017. "Dynamic spillover effects among crude oil, precious metal, and agricultural commodity futures markets," Energy Economics, Elsevier, vol. 62(C), pages 19-32.
  • Handle: RePEc:eee:eneeco:v:62:y:2017:i:c:p:19-32
    DOI: 10.1016/j.eneco.2016.12.011
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    Cited by:

    1. Śmiech, Sławomir & Papież, Monika & Dąbrowski, Marek A. & Fijorek, Kamil, 2018. "What drives food price volatility? Evidence based on a generalized VAR approach applied to the food, financial and energy markets," Economics Discussion Papers 2018-55, Kiel Institute for the World Economy (IfW).
    2. repec:eee:finana:v:58:y:2018:i:c:p:1-7 is not listed on IDEAS
    3. Taylor, Nick, 2017. "Timing strategy performance in the crude oil futures market," Energy Economics, Elsevier, vol. 66(C), pages 480-492.
    4. repec:eee:eneeco:v:71:y:2018:i:c:p:62-69 is not listed on IDEAS
    5. Bos, Martijn & Demirer, Riza & Gupta, Rangan & Tiwari, Aviral Kumar, 2018. "Oil returns and volatility: The role of mergers and acquisitions," Energy Economics, Elsevier, vol. 71(C), pages 62-69.
    6. repec:eee:phsmap:v:506:y:2018:i:c:p:671-678 is not listed on IDEAS
    7. repec:eee:appene:v:215:y:2018:i:c:p:630-642 is not listed on IDEAS
    8. Mehmet Balcilar & Zeynel Abidin Ozdemir, 2018. "The volatility effect on precious metals prices in a stochastic volatility in mean model with time-varying parameters," Working Papers 15-34, Eastern Mediterranean University, Department of Economics.
    9. repec:eee:finana:v:52:y:2017:i:c:p:292-308 is not listed on IDEAS
    10. Rangan Gupta & Seong-Min Yoon, 2017. "OPEC News and Predictability of Oil Futures Returns and Volatility: Evidence from a Nonparametric Causality-in-Quantiles Approach," Working Papers 201726, University of Pretoria, Department of Economics.
    11. repec:spr:nathaz:v:88:y:2017:i:1:d:10.1007_s11069-017-2881-8 is not listed on IDEAS

    More about this item

    Keywords

    Dynamic spillover; Financial crisis; Directional and net spillover index; Multivariate DECO-GARCH model; Time-varying hedge ratio;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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