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Exchange Rate and Industrial Commodity Volatility Transmissions, Asymmetries and Hedging Strategies

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Abstract

This paper examines the inclusion of the dollar/euro exchange rate together with four important and highly traded commodities - aluminum, copper, gold and oil- in symmetric and asymmetric multivariate GARCH and DCC models. The inclusion of exchange rate increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities in all the models. Model 2, which includes the business cycle industrial metal copper and not aluminum, displays more direct and indirect transmissions than does Model 3, which replaces the business cycle-sensitive copper with the highly energy-intensive aluminum. The asymmetric effects are the greatest in Model 3 because of the high interactions between oil and aluminum. Optimal portfolios should have more euro currency than commodities, and more copper and gold than oil.

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  • Shawkat M.Hammoudeh & Yuan Yuan & Michael McAleer, 2010. "Exchange Rate and Industrial Commodity Volatility Transmissions, Asymmetries and Hedging Strategies," Working Papers in Economics 10/33, University of Canterbury, Department of Economics and Finance.
  • Handle: RePEc:cbt:econwp:10/33
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    Cited by:

    1. Halova Wolfe, Marketa & Rosenman, Robert, 2014. "Bidirectional causality in oil and gas markets," Energy Economics, Elsevier, vol. 42(C), pages 325-331.
    2. Andi Duqi & Leonardo Franci & Giuseppe Torluccio, 2014. "The Black-Litterman model: the definition of views based on volatility forecasts," Applied Financial Economics, Taylor & Francis Journals, vol. 24(19), pages 1285-1296, October.

    More about this item

    Keywords

    MGARCH; shocks; volatility; transmission; asymmetries; hedging;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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