Do Shining Precious Metals Overshadow Other Assets? Dynamic Spillovers Between Commodity and Currency Markets

Abstract

In this study, we examine the dynamic link between returns and volatility of commodities and currency markets. In particular, based on weekly data on gold, silver, platinum, palladum, oil and the USD/EUR exchange rate over the period January 6, 1987 to July 22, 2014 we find the following empirical regularities. First, the static spillover analysis reveals that gold, silver and platinum are net transmitters of returns and volatility spillovers, while palladium, crude oil and USD/EUR exchange are net receivers of returns (volatility) spillovers. These results suggest that, the information contents of gold, silver and platinum can help improve forecast accuracy of returns (volatilities) on palladium, crude oil and currency returns (volatilities). Second, returns (volatilities) on gold are interestingly the largest gross transmitters of spillovers to the remaining assets in our model. Third, pairwise return (volatility) spillovers reveal relatively stronger bidirectional interdependences between gold and silver, and platinum and palladium. Fourth, the analysis of dynamic spillovers suggests that gold, silver and, to a lesser extent, platinum act as net transmitters of return (volatility) spillovers to palladium, crude oil and the USD/EUR exchange rate. Interestingly, the observed net transmission shows time- and event-specific patterns. For instance, for gold and silver (platinum) returns and volatility, it intensified (degraded) in the period marked by the global financial crisis. After the global financial crisis, the role of gold and silver (platinum) returns as net transmitters of shocks weakened (strengthened), while the role of gold, silver and platinum volatility as net transmitters of shocks remained relatively high. Overall, our findings reveal that, while the static analysis clearly classifies the aforementioned variables into net transmitters and net receivers, the dynamic analysis denotes episodes wherein the role of transmitters and receivers of return (volatility) spillovers can be interrupted or even reversed. Hence, even if certain commonalities prevail in each identified category of commodities, such commonalities are time- and event-dependent.