The Volatility Behavior and Dependence Structure of Commodity Futures and Stocks

Authors

  • Lin Gao,

    Corresponding author
    1. Lin Gao is at the School of Finance, University of St. Gallen, St. Gallen, Switzerland
    • Correspondence author, the School of Finance, University of St. Gallen, Rosenbergstr. 52, CH-9000 St. Gallen, Switzerland. Tel: +41-71-224-7074, Fax: +41-71-224-7088, e-mail: lin.gao@unisg.ch

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  • Lu Liu

    1. Lu Liu is at the Department of Economics, Lund University, Lund, Sweden
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  • The authors thank Bob Webb (the editor) and an anonymous referee for their helpful comments and suggestions. We are also grateful to Hossein Asgharian, Charlotte Christiansen, Bent Jesper Christensen, Karl Frauendorfer, Pascal Gantenbein, Björn Hansson, Heino Bohn Nielson, Anders Rahbek, Paul Söderlind, Klaus Spremann, and seminar participants at Lund University and the University of St. Gallen, as well as conference participants at the Arne Ryde Workshop in Financial Economics, the 2nd Humboldt–Copenhagen Conference in Financial Econometrics. We thank Hossein Asgharian for his coding of the algorithm of simulated annealing. Financial support from the Bankforskningsinstitutet is appreciated.

Abstract

This study finds substantial risk diversification potential between certain commodity groups and stocks by exploring the dependence between their patterns of regime switching. None of the commodity groups share a common volatility regime with stocks, nor are the regime-switching patterns of grains, industrials, metals, or softs, dependent on that of stocks. Simultaneous volatile regimes of commodity futures and stocks tend to be infrequent and short-lived. In addition, in spite of financial contagion, animal products, grains, and softs typically demonstrate very low correlations with stocks even in simultaneous volatile regimes. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 34:93–101, 2014

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