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Volatility Transmission across Currency, Commodity and Equity Markets under Multi-Chain Regime Switching: Implications for Hedging and Portfolio Allocation

Author

Listed:
  • A. Khalifa
  • S. Hammoudeh
  • E. Otranto
  • S. Ramchander
Abstract
This paper uses the multi-chain Markov Switching model to examine the nature of the volatility transmission across currency, commodity and stock markets, and provide implications for hedging and asset allocation. Results generally indicate the dominant presence of interdependency, as opposed to spillover and comovement relationships, highlighting the mutual reciprocity of individual market shocks across assets. Furthermore, there is evidence that optimal hedge ratios and portfolio weights are regime dependent. For instance, we find that it is more expensive to hedge when the market is in turmoil than when it is tranquil, and portfolio weights are larger for assets that are in the low volatility state.

Suggested Citation

  • A. Khalifa & S. Hammoudeh & E. Otranto & S. Ramchander, 2012. "Volatility Transmission across Currency, Commodity and Equity Markets under Multi-Chain Regime Switching: Implications for Hedging and Portfolio Allocation," Working Paper CRENoS 201214, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:201214
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    Cited by:

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    2. Julien Chevallier & Florian Ielpo, 2013. "Volatility spillovers in commodity markets," Applied Economics Letters, Taylor & Francis Journals, vol. 20(13), pages 1211-1227, September.
    3. Lyócsa, Štefan & Molnár, Peter & Todorova, Neda, 2017. "Volatility forecasting of non-ferrous metal futures: Covariances, covariates or combinations?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 228-247.
    4. Aboura, Sofiane & Chevallier, Julien, 2015. "Volatility returns with vengeance: Financial markets vs. commodities," Research in International Business and Finance, Elsevier, vol. 33(C), pages 334-354.
    5. repec:dau:papers:123456789/13359 is not listed on IDEAS
    6. Todorova, Neda & Worthington, Andrew & Souček, Michael, 2014. "Realized volatility spillovers in the non-ferrous metal futures market," Resources Policy, Elsevier, vol. 39(C), pages 21-31.
    7. Todorova, Neda, 2015. "The course of realized volatility in the LME non-ferrous metal market," Economic Modelling, Elsevier, vol. 51(C), pages 1-12.

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    More about this item

    Keywords

    volatility; interdependence; spillover; comovement; hedging; portfolio allocation;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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