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

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.

Directional Volatility Spillovers Between Agricultural, Crude Oil, Real Estate, and Other Financial Markets

“…Mensi et al (2013) have shown that volatility shocks to the S&P 500 can significantly affect the oil market; the results of their study are also confirmed for range volatility spillovers. Gao and Liu (2014) found that correlations between energy and grains indices and the S&P 500 increase in periods of volatility, which is also in line with the results above.…”

“…But regime switches in the energy index appeared more closely related to equity volatility than those in the grains index. Mensi et al (2013) estimated bivariate VAR-GARCH models for pairs of indices for the period 2000-2011; the pairs consisted of the S&P 500 and the following indices: daily wheat, beverage, gold, crude oil, and Brent oil price. Past volatility and unexpected volatility shocks to the S&P 500 have significant effects on oil, gold, and beverage markets, but not on wheat markets.…”

Causality in distribution between European stock markets and commodity prices: using independence test based on the empirical copula

“…Park and Ratti [2008] use a VAR model. Many authors use the family of GARCH models, specifically bivariate GARCH [Cifarelli, Paladino 2010;Arouri, Lahiani, Nguyen 2011;Arouri 2011;Papież, Śmiech 2012], generalised VAR-GARCH [Arouri, Jouini, Nguyen 2012;Mensi et al 2013] and multivariate GARCH (Creti et al (2013) use dynamic conditional correlation (DCC) GARCH).…”

Effects of Crude Oil and Gold Prices on US Stock Market: Evidence for USA from ARDL Bounds Testing

“…Batten et al [11] found a significant impact of gold price volatility on the financial market returns. Mensi et al [16] studied the correlation and volatility transmission across commodities such as gold and crude oil, and equity market. The results of their study revealed that the changes in S&P500 affect gold and crude oil price volatility.…”

“…Baur and Mc Dermott [16] conducted a descriptive and econometric analysis of data from 1979 to 2009. Results of the study indicated that gold is mostly used as hedge against inflation and considered as safe haven for major European and US stock markets except Australia, Canada, Japan and emerging markets such as BRIC countries.…”