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Nonlinear examination of the ‘Heat Wave’ and ‘Meteor Shower’ effects between spot and futures markets of the precious metals

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  • Dejan Živkov

    (University of Novi Sad)

  • Slavica Manić

    (University of Belgrade)

  • Ivan Pavkov

    (Alpha University)

Abstract

This paper researches two volatility transmission phenomena that take place within (‘heat wave’) and between (‘meteor shower’) spot and futures markets of four precious metals—gold, silver, platinum and palladium. We create conditional volatilities by considering three types of Markov switching GARCH models in combination with three different distribution functions. Conditional volatilities are subsequently embedded in Markov switching mean model. We find that ‘heat wave’ effect is more intense than ‘meteor shower’ effect, and this applies for both spot and futures markets of all precious metals. The results indicate that ‘heat wave’ effect is more intense in high than in low volatility periods, and also this effect is stronger in futures markets than in spot markets. ‘Meteor shower’ effect is stronger in low volatility regime than in high volatility regime, which is particularly true for the futures markets. Rolling regression results are in line with switching parameters. In addition, we find that ‘meteor shower’ effect, from futures to spot market, is stronger when short-term futures are analysed vis-à-vis long-term futures.

Suggested Citation

  • Dejan Živkov & Slavica Manić & Ivan Pavkov, 2022. "Nonlinear examination of the ‘Heat Wave’ and ‘Meteor Shower’ effects between spot and futures markets of the precious metals," Empirical Economics, Springer, vol. 63(2), pages 1109-1134, August.
    • Handle: RePEc:spr:empeco:v:63:y:2022:i:2:d:10.1007_s00181-021-02148-7
    DOI: 10.1007/s00181-021-02148-7
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    More about this item

    Keywords

    Inter and intra volatility transmission effect; Spot and futures markets; Precious metals; Markov switching models in mean and variance;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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