Measurement of Volatility Spillovers and Asymmetric Connectedness on Commodity and Equity Markets
Year: 2020 Volume: 70 Issue: 1 Pages: 42-69
Abstract: We study total, directional, and asymmetric connectedness between four commodity futures and S&P 500 Index over the 2002-2015 period by employing a recently developed approach based on realized measures and variance decomposition. We estimate that, on average, volatility transmission accounts for around one-fifth of the volatility forecast error variance. The shocks to the stock markets play the most crucial role. Volatility spillovers were limited before the 2008 financial crisis, and then sharply increased during the crisis. The directional spillovers detect quite low connectedness between soft agricultural commodities and the rest of the assets that we study, which may improve portfolio investors' trading strategies. Finally, we analyze asymmetric connectedness. Our results defy the common perception that adverse shocks impact volatility spillovers more heavily than the positive ones. Overall, we provide new insights into volatility transmission between analyzed markets, which may inform investment decisions and hedging strategies.
JEL classification: C18, C58, G01, G15, Q02
Keywords: volatility, spillovers, connectedness, asymmetry, commodity
DOI: https://doi.org/10.32065/CJEF.2020.01.03
RePEc: https://ideas.repec.org/a/fau/fauart/v70y2020i1p42-69.html
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