Economic Review, Vol. 74 No. 3, 2023.
Preliminary communication
https://doi.org/10.32910/ep.74.3.5
VOLATILITY SPILLOVERS BETWEEN COMMODITY AND FINANCIAL MARKETS
Karmen Vrhar
Vladimir Arčabić
Abstract
The paper analyzes price volatility spillovers between commodity and financial markets in order to investigate the interconnectedness and market integration and their potential in portfolio risk diversification. The paper analyzes gold and silver prices, oil prices, and the exchange rates of the Euro and British pound using the Diebold-Yilmaz spillover index methodology for high-frequency weekly data from 1988 to 2020. The total spillovers between commodities and exchange rates were found to be 25.7% and the volatility spillover index during the analyzed period mostly ranged between 25% and 50% with extremes during the global financial crisis and during the COVID-19 pandemic. This indicates a strong integration of commodity and financial markets, especially in crisis periods. Also, the results of the work suggest that silver price movements are least affected by spillovers from other markets and therefore silver can be used to diversify risks. The contribution of the paper to the existing literature is as follows: Firstly, the analysis of transmission processes showed significant volatility spillovers between commodity markets and exchange rates, indicating the existence of integration between different markets. Furthermore, a long period of time is analyzed and the dynamic analysis shows intensified volatility spillovers in global crises periods. Secondly, the results of the analysis can help professional forecasters in forecasting and financial analysts to provide a comprehensive investment analysis. Managers and investors can thus design optimal protection instruments against unwanted movements in the financial and commodity markets. Investors benefit from portfolio diversification, and the information content obtained from volatility spillover analysis can be used to assess potential determinants of future risk-adjusted returns, which would help them make investment decisions.
Keywords
gold and silver; crude oil; exchange rate; spillover index; VAR model
Hrčak ID:
302573
URI
Publication date:
17.5.2023.
Visits: 1.068 *