Risk Spillover in the Commodity Market: Is There Any Financialization Effect?

Posted: 27 Feb 2015

See all articles by Matteo Bonato

Matteo Bonato

University of Johannesburg - Department of Economics and Econometrics; Valdon Group GhmB

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

Date Written: February 27, 2015

Abstract

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

Suggested Citation

Bonato, Matteo and Taschini, Luca, Risk Spillover in the Commodity Market: Is There Any Financialization Effect? (February 27, 2015). Available at SSRN: https://ssrn.com/abstract=2571238

Matteo Bonato (Contact Author)

University of Johannesburg - Department of Economics and Econometrics ( email )

P.O. Box 524
Auckland Park 2006, Johannesburg
South Africa

Valdon Group GhmB ( email )

Zurich
Germany

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

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