Volatility spillovers in commodity markets

Abstract

This article investigates volatility spillovers in commodity markets by following the methodology pioneered in Diebold and Yilmaz (2012). By using a broad data set during 1995–2012, we address three key research questions: are there volatility spillovers within commodities? between standard assets and commodities? between commodities and commodity currencies? The main results indicate first that commodities exhibit weaker than other asset classes volatility spillovers. These spillovers have, however, been increasing over the period. Second, agricultural commodities are the commodities exhibiting the lowest spillovers, whereas precious metals and energy are the biggest net contributors. In a diversified portfolio, including commodities – and especially agricultural products – helps decreasing the total spillover index. This stylized fact has, however, been less and less valid over the years. Third, some currencies are more responsive than others to commodity volatility spillovers.

Keywords:

• volatility spillovers
• commodities
• stocks
• bonds
• exchange rates

JEL Classification:

• C32
• C58
• G10
• Q02

Notes

¹ As pointed out in Briere et al. (2012), such spillovers actually encompass two different kinds of phenomena; directional shocks – as documented in Diebold and Yilmaz (2012) – and a contagion effect as defined by Forbes and Rigobon (2002). Contagion can be defined as a significant increase in cross-market linkages after a shock. In this article, our focus is primarily on the directional effects that can be uncovered from our dataset.

² For more details about variance decomposition in the case of VAR(p), see Lutkepohl (2011).

³ Note we use a trade weighted index of the USD.

⁴ These settings are used as a benchmark since Diebold and Yilmaz (2012). They perform comparisons with different specifications, highlighting the mild impact of close but different specifications of the VAR model on their results.