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Dynamic spillover effects among crude oil, precious metal, and agricultural commodity futures markets

Sang Hoon Kang, Ron McIver and Seong-Min Yoon ()

Energy Economics, 2017, vol. 62, issue C, 19-32

Abstract: This paper examines spillover effects among six commodity futures markets – gold, silver, West Texas Intermediate crude oil, corn, wheat, and rice – by employing the multivariate DECO-GARCH model and the spillover index. Specifically, we investigate the dynamics of return and volatility spillover indices to reveal the intensity and direction of transmission during the recent global financial and European sovereign debt crises. Our empirical results are as follows. First, we estimate a positive equicorrelation between commodity futures market returns and find that it increased sharply during the crises. This effect can persist during periods of economic and financial turmoil, diminishing the benefits of international portfolio diversification for investors. Second, we identify bidirectional return and volatility spillovers across commodity futures markets, and find more pronounced trends in their levels in the post-crisis period. This indicates the strong impact of spillovers during crisis periods. Third, both gold and silver are information transmitters to other commodity futures markets, while the remaining four commodity futures investigated were receivers of spillovers during recent periods of financial stress. Finally, we analyse the optimal portfolio weights and time-varying hedge ratios between metal and other commodities futures markets. Overall, our findings provide new insights into channels of information transmission, which may improve investment decisions and inform portfolio investors' trading strategies.

Keywords: Dynamic spillover; Financial crisis; Directional and net spillover index; Multivariate DECO-GARCH model; Time-varying hedge ratio (search for similar items in EconPapers)
JEL-codes: C58 G11 G14 Q47 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
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DOI: 10.1016/j.eneco.2016.12.011

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