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Financialization, crisis and commodity correlation dynamics

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Listed author(s):
  • Silvennoinen, Annastiina
  • Thorp, Susan

Abstract

Stronger investor interest in commodities may create closer integration with conventional asset markets. We estimate sudden and gradual changes in correlation between stocks, bonds and commodity futures returns driven by observable financial variables and time, using double smooth transition conditional correlation (DSTCC–GARCH) models. Most correlations begin the 1990s near zero but closer integration emerges around the early 2000s and reaches peaks during the recent crisis. Diversification benefits to investors across equity, bond and stock markets were significantly reduced. Increases in VIX and financial traders’ short open interest raise futures returns volatility for many commodities. Higher VIX also increases commodity returns correlation with equity returns for about half the pairs, indicating closer integration.

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File URL: http://www.sciencedirect.com/science/article/pii/S1042443112001059
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Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 24 (2013)
Issue (Month): C ()
Pages: 42-65

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Handle: RePEc:eee:intfin:v:24:y:2013:i:c:p:42-65
DOI: 10.1016/j.intfin.2012.11.007
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

Keywords: Smooth transition; Financial integration; Global financial crisis;

Other versions of this item:

Find related papers by JEL classification:
  • 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; Diffusion Processes

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