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Volatility Transmission across Currency, Commodity and Equity Markets under Multi-Chain Regime Switching: Implications for Hedging and Portfolio Allocation

Ahmed Khalifa (), S. Hammoudeh, Edoardo Otranto () and S. Ramchander

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: This paper uses the multi-chain Markov Switching model to examine the nature of the volatility transmission across currency, commodity and stock markets, and provide implications for hedging and asset allocation. Results generally indicate the dominant presence of interdependency, as opposed to spillover and comovement relationships, highlighting the mutual reciprocity of individual market shocks across assets. Furthermore, there is evidence that optimal hedge ratios and portfolio weights are regime dependent. For instance, we find that it is more expensive to hedge when the market is in turmoil than when it is tranquil, and portfolio weights are larger for assets that are in the low volatility state.

Keywords: volatility; interdependence; spillover; comovement; hedging; portfolio allocation (search for similar items in EconPapers)
JEL-codes: G13 G15 F37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2012
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https://crenos.unica.it/crenos/sites/default/files/WP12-14.pdf (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:201214

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