Volatility Interrelationship between Commodity Futures, Shanghai Stock and 10 Year Bond Indices in China

Abstract

This article studies the conditional means of 9 commodity futures in China from Dec, 2006 to Jan, 2010 period and finds that they are significant, which indicating that risk transfers do occur in commodity futures markets between speculators and hedgers. The paper also finds that the conditional correlation falls in period of recession; namely, when market risk rises, which is good news to asset managers since it is precisely when market volatility is high that the benefits of diversification are most appreciated. On the other hand, the negative correlation between the Government 10 year bond and commodity futures Indices rises with the bond volatility, suggesting that, unlike stocks, a bond and commodity portfolio should be tilted more towards commodity futures in periods of high bond volatility. This paper is trying to find such interrelations in Chinese commodity futures Market, Stock Market and Bond Market during 2006-2010 period, utilizing the econometrical (GARCH, ARCH) models produced by Bollerslev (1986) and Engle (1982).