Exchange Rate and Industrial Commodity Volatility Transmissions and Hedging Strategies
33 Pages Posted: 16 Sep 2009
Date Written: September 15, 2009
This paper examines the inclusion of the dollar/euro exchange rate together with important commodities in two different BEKK, or multivariate conditional covariance, models. Such inclusion increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities, as compared with their effects in the all-commodity basic model (Model 1), which includes the highly-traded aluminum, copper, gold and oil. Model 2, which includes copper, gold, oil and exchange rate, displays more direct and indirect transmission than does Model 3, which replaces the business cycle-sensitive copper with the highly energy-intensive aluminum. Optimal portfolios should have more Euro than commodities, and more copper and gold than oil. The multivariate conditional volatility models reveal greater volatility spillovers than their univariate counterparts.
Keywords: Multivariate GARCH, shocks, volatility, transmission, portfolio weights
JEL Classification: C51, E27, Q43
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