Time-varying volatility spillovers between stock and precious metal markets with portfolio implications

Abstract

This paper investigates the time-varying risk spillovers between precious metals (gold, silver, palladium, and platinum) and major stock markets (USA, Japan, Europe and Asia) using the spillover index of Diebold and Yilmaz (2012). We also analyze asset allocations, hedge ratios, and hedging strategies. The results show evidence of volatility spillovers between precious metal and stock markets. Further, all the stock markets (except for Japanese market) are a source of volatility spillovers and the four precious metal markets are net receipt of volatility spillovers during the Global Financial Crisis and European Sovereign Debt Crisis. Finally, we find evidence of cross-market hedging, asset allocation, and hedging effectiveness.