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

Dejan Živkov (), Slavica Manić () and Ivan Pavkov ()
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Dejan Živkov: University of Novi Sad
Slavica Manić: University of Belgrade
Ivan Pavkov: Alpha University

Empirical Economics, 2022, vol. 63, issue 2, No 19, 1109-1134

Abstract: 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.

Keywords: Inter and intra volatility transmission effect; Spot and futures markets; Precious metals; Markov switching models in mean and variance (search for similar items in EconPapers)
JEL-codes: C24 C52 Q02 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s00181-021-02148-7

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