TY - UNPB
T1 - Forecasting Volatility of Commodity, Currency, and Stock Markets
T2 - Evidence from Markov Switching Multifractal Models
AU - Liu, Ruipeng
AU - Segnon, Mawuli
AU - Cepni, Oguzhan
AU - Gupta, Rangan
PY - 2023/12
Y1 - 2023/12
N2 - This paper adopts a bivariate Markov switching multifractal (MSM) model to reexamine co-movement in stochastic volatility between commodity, foreign exchange (FX) and stock markets. After the 2007-2008 global financial crisis understanding volatility linkages and the correlation structure between these markets becomes very important for risk analysts, portfolio managers, traders, and governments. Using daily data on stock indices and FX rates from developed and emerging countries and a range of commodities such crude oil, natural gas, aluminum, copper, gold, silver, platinum, wheat, corn, soybean and soybean oil we find evidence of (re)correlation between commodity, FX and stock markets. The bivariate MSM model compares favorably to a bivariate DCC-GARCH and univariate MSM model, especially at short (1, 5 and 10 days) forecasting horizons. Furthermore, we discuss its implications for risk and portfolio management.
AB - This paper adopts a bivariate Markov switching multifractal (MSM) model to reexamine co-movement in stochastic volatility between commodity, foreign exchange (FX) and stock markets. After the 2007-2008 global financial crisis understanding volatility linkages and the correlation structure between these markets becomes very important for risk analysts, portfolio managers, traders, and governments. Using daily data on stock indices and FX rates from developed and emerging countries and a range of commodities such crude oil, natural gas, aluminum, copper, gold, silver, platinum, wheat, corn, soybean and soybean oil we find evidence of (re)correlation between commodity, FX and stock markets. The bivariate MSM model compares favorably to a bivariate DCC-GARCH and univariate MSM model, especially at short (1, 5 and 10 days) forecasting horizons. Furthermore, we discuss its implications for risk and portfolio management.
KW - Multifractal processes
KW - Volatility co-movement
KW - Commodity returns
KW - Foreign exchange returns
KW - Stock returns
KW - Multifractal processes
KW - Volatility co-movement
KW - Commodity returns
KW - Foreign exchange returns
KW - Stock returns
M3 - Working paper
T3 - Working Paper Series / Department of Economics. University of Pretoria
BT - Forecasting Volatility of Commodity, Currency, and Stock Markets
PB - University of Pretoria
CY - Pretoria
ER -