Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold

Mensi, Walid and Beljid, Makram and Boubaker, Adel and Managi, Shunsuke (2013): Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold. Published in:

Abstract

This paper employs a VAR-GARCH model to investigate the return links and volatility transmission between the S&P 500 and commodity price indices for energy, food, gold and beverages over the turbulent period from 2000-2011. Understanding the price behavior of commodity prices and the volatility transmission mechanism between these markets and the stock exchanges are crucial for each participant, including governments, traders, portfolio managers, consumers, and producers. For return and volatility spillover, the results show significant transmission among the S&P 500 and commodity markets. The past shocks and volatility of the S&P 500 strongly influenced the oil and gold markets. This study finds that the highest conditional correlations are between the S&P 500 and gold index and the S&P 500 and WTI index. We also analyze the optimal weights and hedge ratios for commodities/S&P 500 portfolio holdings using the estimates for each index. Overall, our findings illustrate several important implications for portfolio hedgers for making optimal portfolio allocations, engaging in risk management and forecasting future volatility in equity and commodity markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock markets, Commodity prices, Volatility spillovers, Hedge ratios, VAR-GARCH models, Energy price
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q34 - Natural Resources and Domestic and International Conflicts; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply ; Prices

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