An empirical examination of correlation dynamics between commodity and equity derivative indices: evidence from India using DCC-GARCH models

Perumandla Swamy and Kurisetti Padma

Afro-Asian Journal of Finance and Accounting, 2020, vol. 10, issue 2, 207-234

Abstract: This empirical study investigates the time-varying co-movements and volatility linkages between equity-commodity indices and inter-commodity indices. This paper deploys DCC-GARCH framework. Three versions of GARCH namely standard, threshold and exponential with both symmetric and asymmetric versions of dynamic conditional correlations (DCC) have been used. This study considers equity index Nifty 50, non-agricultural commodity indices MCX Energy and MCX Metal along with agricultural commodity indices Dhaanya and MCX Agri. Our results revealed that the combined portfolio of commodities-equity has low or negative correlations, which provide better diversification property rather than a portfolio without commodities. However, we notice a steep decline in time-varying correlations of equity with non-agricultural commodity portfolio since 2013. The mixed portfolio of the agricultural commodity with non-agricultural commodity can also offer diversifying benefits. We found high volatility shifts in time-varying co-movements of Nifty 50-MCX Agri pair. On the other hand, we observed an increasing trend in the co-movements of Nifty 50-Dhaanya, it indicates the interdependency of these two markets. Non-agricultural commodity pair (MCX Energy-MCX Metal) and agricultural commodity pair (MCX Agri-Dhaanya) fail to offer better-diversifying properties. This study provides an essential insight to policymakers, portfolio managers, domestic and international investors, risk analysts and financial researchers in an emerging market.

Keywords: commodity derivative markets; equity market; DCC-GARCH; time-varying co-movements; diversifying portfolio; volatility; emerging markets. (search for similar items in EconPapers)
Date: 2020
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