Modelling time varying volatility spillovers and conditional correlations across commodity metal futures

Menelaos Karanasos,Faek Menla Ali,Zannis Margaronis,Rajat Nath

doi:10.1016/j.irfa.2017.11.003

Menelaos Karanasos, Faek Menla Ali + Show 2 more

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https://doi.org/10.1016/j.irfa.2017.11.003

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Abstract

This paper examines how the most prevalent stochastic properties of key metal futures returns have been affected by the recent financial crisis using both mapped and unmapped data. Our results suggest that copper and gold futures returns exhibit time-varying persistence in their corresponding conditional volatilities over the crisis period; in particular, such persistence increases during periods of high volatility compared with low volatility. The estimation of a bivariate GARCH model further shows the existence of time-varying volatility spillovers between these returns during the different stages of such a crisis. Our results, which are broadly the same in relation to the use of mapped or unmapped data, suggest that the volatilities of copper and gold are inherently linked, although these metals have very different applications.

Highlights

The financial crisis of 2007–08 and the European sovereign debt crisis that occurred afterwards sent a wave of panic throughout financial and commodity markets around the globe
This paper aims to fill in the existing gaps by analysing the impact of the recent crisis on the volatility dynamics and the associated cross-linkages of two metal futures, namely copper and gold, and by using alternative econometric specifications and data compared to the wide existing literature, the bivariate (UEDCC) AGARCH model and two types of data: mapped and unmapped
Our findings suggest that the volatility persistence of these metal futures returns exhibit a substantial time-variation over the recent financial crisis; in particular, such persistence is shown to increase during periods of high volatility compared with low volatility

Summary

Introduction

The financial crisis of 2007–08 and the European sovereign debt crisis that occurred afterwards sent a wave of panic throughout financial and commodity markets around the globe. To the best of our knowledge, the studies by Vivian and Wohar (2012) and Sensoy (2013) are the only ones to date to have examined the impact of the recent crisis on the volatility of commodity returns, even though they consider spot price data. Such studies have limitations in that they ignore the impact of the crisis on the cross-shock and volatility spillovers between the corresponding returns

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