The Volatility Behavior and Dependence Structure of Commodity Futures and Stocks

Journal of Futures Markets, vol. 34(1), pp. 93-101, 2014

14 Pages Posted: 26 Jun 2011 Last revised: 9 Oct 2015

See all articles by Lin Gao

Lin Gao

Luxembourg School of Finance; Universite du Luxembourg

Lu Liu

Stockholm Business School, Stockholm University; Knut Wicksell Centre for Financial Studies

Date Written: July 18, 2012

Abstract

This paper 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.

Keywords: stocks, commodity futures, regime switching, volatility, correlation, diversification

JEL Classification: C22, G11, G12, G13

Suggested Citation

Gao, Lin and Gao, Lin and Liu, Lu, The Volatility Behavior and Dependence Structure of Commodity Futures and Stocks (July 18, 2012). Journal of Futures Markets, vol. 34(1), pp. 93-101, 2014, Available at SSRN: https://ssrn.com/abstract=1872523 or http://dx.doi.org/10.2139/ssrn.1872523

Lin Gao

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg

Lu Liu (Contact Author)

Stockholm Business School, Stockholm University ( email )

Sweden
+46(0)721489000 (Phone)

Knut Wicksell Centre for Financial Studies ( email )

Box 7080
Lund, SE-220 07
Sweden

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