Time-variation between metal commodities and oil, and the impact of oil shocks: GARCH-MIDAS and DCC-MIDAS analyses

Yaya, OlaOluwa S. and Ogbonna, Ahamuefula E. and Adesina, Ayobami O. and Alobaloke, Kafayat and Vo, Xuan Vinh (2022): Time-variation between metal commodities and oil, and the impact of oil shocks: GARCH-MIDAS and DCC-MIDAS analyses. Forthcoming in: Resources Policy

Abstract

Extant literature establishes co-movements among commodity (metal and oil) prices; whereas oil price/shocks aggregate, as a lone predictor, has relative predictability for most financial assets. We assess the predictability of Baumeister and Hamilton's (2019) decomposed oil shocks (economic activity shocks, oil consumption demand shocks, oil inventory demand shocks, and oil supply shocks) for conditional volatilities of prominently traded precious metals (gold, palladium, platinum, and silver) using GARCH-MIDAS-X framework. The asymmetric effect of decomposed oil shocks on precious metals’ volatilities is examined. The DCC-MIDAS framework allows to investigate the conditional correlations and volatility between oil and precious metal prices. Results show that precious metals exhibit hedging potentials against oil demand and supply shocks, with heterogeneity observed in the precious metal-oil shocks nexus. Asymmetry is evident in the responses of metals’ volatility to oil shocks. DCC-MIDAS results reveal significant dynamic correlations between oil prices and precious metals (except for platinum). Our results are robust (sensitive) to precious metals (oil shocks) proxies. The findings are insightful for commodity market stakeholders.

• Item Type: MPRA Paper
• Language: English
• Keywords: GARCH-MIDAS; DCC-MIDAS; Disaggregated oil shocks; Dynamic correlation; Platinum
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes

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