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Forecasting Volatility of Commodity, Currency, and Stock Markets: Evidence from Markov Switching Multifractal Models

Author

Listed:
  • Ruipeng Liu

    (Department of Finance, Deakin Business School, Deakin University, Australia)

  • Mawuli Segnon

    (Department of Economics, University of Munster, Germany)

  • Oguzhan Cepni

    (Department of Economics, Copenhagen Business School, Denmark; Ostim Technical University, Ankara, Turkiye)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

Abstract

This paper adopts a bivariate Markov switching multifractal (MSM) model to reexamine co-movement in stochastic volatility between commodity, foreign exchange (FX) and stock markets. After the 2007-2008 global financial crisis understanding volatility linkages and the correlation structure between these markets becomes very important for risk analysts, portfolio managers, traders, and governments. Using daily data on stock indices and FX rates from developed and emerging countries and a range of commodities such crude oil, natural gas, aluminum, copper, gold, silver, platinum, wheat, corn, soybean and soybean oil we find evidence of (re)correlation between commodity, FX and stock markets. The bivariate MSM model compares favorably to a bivariate DCC-GARCH and univariate MSM model, especially at short (1, 5 and 10 days) forecasting horizons. Furthermore, we discuss its implications for risk and portfolio management.

Suggested Citation

  • Ruipeng Liu & Mawuli Segnon & Oguzhan Cepni & Rangan Gupta, 2023. "Forecasting Volatility of Commodity, Currency, and Stock Markets: Evidence from Markov Switching Multifractal Models," Working Papers 202340, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202340
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    References listed on IDEAS

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    Keywords

    Multifractal processes; Volatility co-movement; Commodity returns; Foreign exchange returns; Stock returns;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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