Mean and volatility transmission for commodity futures

Abstract

This paper employs a two-step GARCH-M procedure to study price and volatility spillover effects between nine physical commodity futures contracts, as well as transmissions to those commodities from Eurodollars, the S&P500, and the U.S. Dollar Index. Our results show a strong pattern of price spillovers which indicate that price innovations for one commodity tend to have information that is transferred to other commodities. We also document the presence of volatility spillover effects that reflect the transmission of risk-pricing between commodities. Overall, corn was demonstrated to be the commodity that most broadly received and transmitted both price and volatility spillovers, followed by crude oil. In addition, spillover effects are broadly documented within each commodity complex and from the external markets observed. The results demonstrate the need to account for cross-commodity spillovers of both price and volatility when modeling optimal portfolio allocations and also when creating commodity based hedging models.