Dynamic Spillover between Commodities and Commodity Currencies During United States Q.E.

This paper comprehensively discusses the dynamic relationship between commodities and commodity currencies, particularly during the U.S. quantitative easing (QEs), by integrating the generalized spillover index into a fractionally integrated VAR (FIVAR) model. Our empirical analyses reach the following conclusions. First, the static return and volatility spillovers analyses show that the Food is the only net receivers among all the commodity price indices. Second, the dynamic total return and volatility spillover accelerated growth in term of the index by roughly between 15 and 25% for four regional groups during the initiation of the QE1 and subsequently remained across the first two rounds of the U.S. QE. Nevertheless, both the total return and volatility spillover declined in the midst of the QE3 as the U.S. Federal Reserve signaled the QE tapering due to the anticipated U.S. economic recovery. Third, the Energy and Metals components were the largest net transmitters of return and volatility spillovers during the U.S. QEs. A possible interpretation is that demand for energy and metals increase associated with an increase in economic activity that is triggered by the U.S. QEs. Last, almost all the sample commodity currencies acted as net receivers of return and volatility spillovers during the U.S. QEs, supporting the pass-through of commodities to commodity currencies.

Keywords: Quantitative Easing, Commodity Markets, Commodity Currencies, Static and Dynamic Spillovers, FIVAR

JEL Classification: C32, C5, E52, F31

Suggested Citation: Suggested Citation

Yip, Pick Schen and Brooks, Robert Darren and Do, Hung Xuan, Dynamic Spillover between Commodities and Commodity Currencies During United States Q.E. (July 16, 2017). Energy Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3003639