Abstract
This study aims to examine volatility spillover among equity and commodity markets of the United States. The analysis focuses on crude oil (Brent and WTI [West Texas Intermediate]), rice, and gasoline. For the analysis, generalized autoregressive conditional heteroscedasticity (GARCH) (1, 1) model is applied on monthly data for the period of February 2005 to December 2016. Results show that there is no volatility spillover from commodity market (gold, oil, gas, and rice) to equity market, whereas it only exists in few commodity markets, from oil to rice and gas. The study also finds that there is neither mean spillover nor volatility spillover among gold and equity market; therefore, investor can invest in equity and gold to diversify risk of portfolio.
Highlights
Understating the stock market volatility and transmission of volatility between different stock markets has been the key challenges for all market agents, including investors, policy makers, money managers, portfolio managers, and others
After reviewing the relevant literature, we find that investigation of volatility spillover effect among stock and commodity market is keen interest area of researchers
Augmented Ducky Fuller (ADF) and Phillips–Perron (PP) tests are used to check whether the return series is stationary or not, and the results show that return series of all variables are stationary at level
Summary
Understating the stock market volatility and transmission of volatility between different stock markets has been the key challenges for all market agents, including investors (individual and institutional investor), policy makers, money managers, portfolio managers, and others. The volatility transmission between developed and developing countries has been studied. This kind of study is very essential for such market agents who are interested in knowing the systematic risk and portfolio risk and return at the time of making investment in different stock markets (Mensi et al, 2016). Due to the integration of markets, researchers have studied the volatility spillover from one market to another market to mitigate risk (e.g., Domanski & Heath, 2007; Dwyer et al, 2011; Erb & Harvey, 2006; Silvennoinen & Thorp, 2013; Tang & Xiong, 2012). Spillover effect is the event in one market due to an event in another market. Whatever happens in one market will have effect on the other market
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