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Local Gaussian correlations in financial and commodity markets

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  • Nguyen, Quynh Nga
  • Aboura, Sofiane
  • Chevallier, Julien
  • Zhang, Lyuyuan
  • Zhu, Bangzhu

Abstract

We investigate the increased correlations between commodity and U.S. financial markets, as well as among commodity markets from 1992 to 2017 under a non-linear framework. We study how far the phenomenon of financialization is sustainable, given the several significant events that shaped the 2000s. We use a new measure of asymmetric dependence, namely the local Gaussian correlation which distinguishes between positive and negative local dependence, to detect whether the dependence between commodities and securities and with each other has become stronger. By examining the local Gaussian correlation before and after the break dates, we can apply the contagion test with a bootstrap procedure. Several robustness checks have been performed. The contagion tests give consistent results with the local Gauss correlation estimates. Our findings confirm the existence of the financialization phenomenon between stock markets and commodity markets particularly after the 08/2008 break date. A remarkable exception to financialization remains the gold market.

Suggested Citation

  • Nguyen, Quynh Nga & Aboura, Sofiane & Chevallier, Julien & Zhang, Lyuyuan & Zhu, Bangzhu, 2020. "Local Gaussian correlations in financial and commodity markets," European Journal of Operational Research, Elsevier, vol. 285(1), pages 306-323.
    • Handle: RePEc:eee:ejores:v:285:y:2020:i:1:p:306-323
    DOI: 10.1016/j.ejor.2020.01.023
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