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Mean and volatility transmission for commodity futures

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Abstract

This paper employs a two-step GARCH-M procedure to study price and volatility spillover effects between nine physical commodity futures contracts, as well as transmissions to those commodities from Eurodollars, the S&P500, and the U.S. Dollar Index. Our results show a strong pattern of price spillovers which indicate that price innovations for one commodity tend to have information that is transferred to other commodities. We also document the presence of volatility spillover effects that reflect the transmission of risk-pricing between commodities. Overall, corn was demonstrated to be the commodity that most broadly received and transmitted both price and volatility spillovers, followed by crude oil. In addition, spillover effects are broadly documented within each commodity complex and from the external markets observed. The results demonstrate the need to account for cross-commodity spillovers of both price and volatility when modeling optimal portfolio allocations and also when creating commodity based hedging models.

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Notes

  1. The ARMA lag lengths are specified by observing the Ljung-Box Q-statistic for the residuals to test for serial correlation in the mean equation and the Ljung-Box Q-statistic for the squared residuals to test for serial correlation in the variance equation. In most cases an ARMA(1,1) specification was called appropriate. Higher order values for p and q in the ARMA specification were required in only a few instances.

  2. http://www.epa.gov/oecaagct/ag101/cropmajor.html

  3. http://www.soymeal.org/worldlitarticles_new/soysegmentreview.html

  4. http://www.ers.usda.gov/AmberWaves/February07/Findings/RoughRice.htm

  5. http://www.uaex.edu/Other_Areas/publications/PDF/FSA-3047.pdf

  6. http://naturalgas.org/overview/uses_industry.asp

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  1. University of Idaho, College of Business and Economics, P.O. Box 443178, Moscow, ID, 88344-3178, USA

    Terrance Grieb

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  1. Terrance Grieb
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Correspondence to Terrance Grieb.

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Grieb, T. Mean and volatility transmission for commodity futures. J Econ Finan 39, 100–118 (2015). https://doi.org/10.1007/s12197-012-9245-8

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  • DOI: https://doi.org/10.1007/s12197-012-9245-8

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