Volatility spillover from oil prices to precious metals under different regimes

Ayşegül Kirkpınar

A chapter in Contemporary Issues in Business Economics and Finance, 2020, vol. 104, pp 45-56 from Emerald Group Publishing Limited

Abstract: Introduction– Increases in prices of commodity markets may be associated with increased volatility in financial markets. That is why analysing time-varying co-movements of commodity prices can be of great importance for investors who take into consideration optimal asset allocation. Purpose– The aim of this study is to investigate the volatility spillover from oil to precious metals under high-volatility and low-volatility regimes. Methodology –The data covered daily closing prices of assets such as oil, palladium, and platinum for the period January 2010–December 2018. GARCH models were analysed in order to determine the most appropriate volatility structure, and it was determined that GARCH (1,1) model was the most suitable model for all commodities. Markov Switching model was used to analyse the volatility spillover from oil to precious metals. Findings– According to the analyses, the results showed that there were volatility spillovers from oil to palladium and platinum in low-volatility regimes and from oil to platinum in high-volatility regimes. On the other hand, there was no volatility spillover from oil to palladium in high-volatility regimes. Investing into oil and palladium in the same portfolio can provide diversification benefits for investors in high-volatility regimes. On the other hand, investing into oil and palladium in the same portfolio may not provide diversification benefits for investors in low-volatility regimes. The findings of the analyses can be beneficial for investors, market participants, and portfolio managers to make an accurate portfolio management.

Keywords: Volatility spillover; Markov switching model; commodity markets; precious metals; oil; portfolio management; G11; G15; C22 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:csefzz:s1569-375920200000104005

DOI: 10.1108/S1569-375920200000104005

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