Financialization, Crisis and Commodity Correlation Dynamics

Annastiina Silvennoinen and Susan Thorp

No 267, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We study bi-variate conditional volatility and correlation dynamics for individual commodity futures and financial assets from May 1990-July 2009 using DSTCC-GARCH (Silvennoinen and Terasvirta 2009). These models allow correlation to vary smoothly between extreme states via transition functions driven by indicators of market conditions. Expected stock volatility and money manager open interest in futures markets are relevant transition variables. Results point to increasing integration between commodities and financial markets. Higher commodity returns volatility is predicted by lower interest rates and corporate bond spreads, US dollar depreciations, higher expected stock volatility and financial traders open positions. We observe higher and more variable correlations between commodity futures and financial asset returns, particularly from mid-sample, often predicted by higher expected stock volatility. For many pairings, we observe a structural break in the conditional correlation processes from the late 1990s.

Keywords: commodity futures; double smooth transition; conditional correlation; financialization (search for similar items in EconPapers)
JEL-codes: C22 G01 G11 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2010-01-01
New Economics Papers: this item is included in nep-bec and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

Published as: Silvennoinen, A. and Thorp, S., 2013, "Financialization, Crisis and Commodity Correlation Dynamics", Journal of International Financial Markets, Institutions and Money, 24, 42-65.

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Journal Article: Financialization, crisis and commodity correlation dynamics (2013)
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