Exchange Rate and Industrial Commodity Volatility Transmissions and Hedging Strategies

33 Pages Posted: 16 Sep 2009

See all articles by Shawkat M. Hammoudeh

Shawkat M. Hammoudeh

Montpellier Business School; Drexel University - Lebow College of Business

Yuan Yuan

Drexel University - Bennett S. LeBow College of Business

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Date Written: September 15, 2009

Abstract

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

Suggested Citation

Hammoudeh, Shawkat M. and Yuan, Yuan and McAleer, Michael, Exchange Rate and Industrial Commodity Volatility Transmissions and Hedging Strategies (September 15, 2009). Available at SSRN: https://ssrn.com/abstract=1473939 or http://dx.doi.org/10.2139/ssrn.1473939

Shawkat M. Hammoudeh

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Drexel University - Lebow College of Business ( email )

3141 Chestnut Street
Philadelphia, PA 19104
United States
2158956673 (Phone)
2158956975 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/HammoudehS/

Yuan Yuan

Drexel University - Bennett S. LeBow College of Business

101 N. 33rd St.
Philadelphia, PA 19104
United States

Michael McAleer (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

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