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Financial Crises, Financialization of Commodity Markets and Correlation of Agricultural Commodity Index with Precious Metal Index and S&P500

  • M.Fatih Oztek

    ()

    (Department of Economics, METU)

  • Nadir Ocal

    ()

    (Department of Economics, METU)

This paper tests and models time varying correlations among agricultural commodity, precious metal and S&P500 indices to uncover whether rising trend among these markets is a result of financialization of commodity markets and/or financial crisis. We particularly investigate the roles of market news, global and market volatility on the nature and dynamics of the correlation. Empirical results show that high volatility during financial crisis is the main source of high correlation of agricultural commodity index with S&P500 and precious metal index, and plays crucial role in correlation between precious metal index and S&P500, possibly due to increasing engagement of financial market investors in commodity markets during financial crisis. Hence, heterogeneous structure of commodity markets delivers better portfolio diversification opportunities during calm periods compared to turmoil periods of financial crisis.

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File URL: http://www.erc.metu.edu.tr/menu/series13/1302.pdf
File Function: First version, 2013
Download Restriction: no

Paper provided by ERC - Economic Research Center, Middle East Technical University in its series ERC Working Papers with number 1302.

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Length: 20 pages
Date of creation: Feb 2013
Date of revision: Feb 2013
Handle: RePEc:met:wpaper:1302
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  1. 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.
  2. Silvennoinen, Annastiina & Teräsvirta, Timo, 2007. "Modelling Multivariate Autoregressive Conditional Heteroskedasticity with the Double Smooth Transition Conditional Correlation GARCH model," SSE/EFI Working Paper Series in Economics and Finance 0652, Stockholm School of Economics.
  3. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  4. Oecd, 2008. "RFID Guidance and Reports," OECD Digital Economy Papers 150, OECD Publishing.
  5. AfDB AfDB, . "AfDB Group Annual Report 2007," Annual Report, African Development Bank, number 63 edited by Koua Louis Kouakou, 7.
  6. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  7. Annastiina Silvennoinen & Timo Teräsvirta, 2005. "Multivariate Autoregressive Conditional Heteroskedasticity with Smooth Transitions in Conditional Correlations," Research Paper Series 168, Quantitative Finance Research Centre, University of Technology, Sydney.
  8. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  9. Nadir Ocal & Denise R. Osborn, 2000. "Business cycle non-linearities in UK consumption and production," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 27-43.
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