International commodity market and stock volatility predictability: Evidence from G7 countries

Abstract

The existing literature has extensively documented the close connection between commodity and stock markets. This empirical study investigates the predictive role of seven metal commodities (gold, silver, aluminum, lead, copper, zinc, and nickel) in G7 stock volatility. The results of the individual factor analysis indicate that gold and silver outperform their peers in both statistical and economic evaluation methods. To extract comprehensive predictive content, we further investigate the forecasting performance using combination forecast, dimension reduction, and shrinkage methods. Moreover, our empirical results indicate that commodity volatility information can transmit to international equity markets through the ratio of gold to platinum prices (GP) and the ratio of silver to platinum prices (SP).