Forecasting Volatility of Commodity, Currency, and Stock Markets: Evidence from Markov Switching Multifractal Models

Ruipeng Liu, Mawuli Segnon (), Oguzhan Cepni and Rangan Gupta
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Ruipeng Liu: Department of Finance, Deakin Business School, Deakin University, Australia
Mawuli Segnon: Department of Economics, University of Munster, Germany

No 202340, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper adopts a bivariate Markov switching multifractal (MSM) model to reexamine co-movement in stochastic volatility between commodity, foreign exchange (FX) and stock markets. After the 2007-2008 global financial crisis understanding volatility linkages and the correlation structure between these markets becomes very important for risk analysts, portfolio managers, traders, and governments. Using daily data on stock indices and FX rates from developed and emerging countries and a range of commodities such crude oil, natural gas, aluminum, copper, gold, silver, platinum, wheat, corn, soybean and soybean oil we find evidence of (re)correlation between commodity, FX and stock markets. The bivariate MSM model compares favorably to a bivariate DCC-GARCH and univariate MSM model, especially at short (1, 5 and 10 days) forecasting horizons. Furthermore, we discuss its implications for risk and portfolio management.

Keywords: Multifractal processes; Volatility co-movement; Commodity returns; Foreign exchange returns; Stock returns (search for similar items in EconPapers)
JEL-codes: C53 C58 G15 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2023-12
New Economics Papers: this item is included in nep-eur, nep-ifn and nep-rmg
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