Risk Spillover in the Commodity Market: Is There Any Financialization Effect?
Posted: 27 Feb 2015
Date Written: February 27, 2015
This papers investigates the change in risk transmission mechanism between commodities as a result of the financialization of the commodity market. Relying on intra-day price observations for 25 commodities traded in the US market, the time series of realized variances/covariances is constructed. Risk spillover is then measured by mean of a recently introduce multivariate realized volatility model, the Wishart Autoregressive model (WAR). Risk transmission between commodities belonging to the same sector (Energy, Grains, Soft, Livestock and Metals) has been volatile in the last 10 years and has particularly increased for Energy, Precious Metals and between agricultural commodities and Oil.
This finding is shown to have a profound effect in terms of hedging ratios, optimal portfolio weights and ultimately on the diversification benefits the commodities as asset class were associated to.
Keywords: Commodities; Financialization; Volatility Spillover
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