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Related commodity markets and conditional correlations

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  • Watkins, Clinton
  • McAleer, Michael

Abstract

Related commodity markets have two characteristics: (i) they may be expected to follow similar volatility processes; (ii) such markets are frequently represented by a market aggregate or index. Indices are used to represent the performance and aggregate time series properties of a group of markets. An important issue regarding the time series properties of an index is how the index reflects the corresponding properties of its components, particularly with regard to volatility and risk. This paper investigates the volatility of a market index relative to the volatility of its underlying assets by analysing correlation matrices derived from rolling AR(1)-generalised autoregressive conditional heteroskedasticity (GARCH)(1,1) model estimates. The second moment properties of a linear aggregate of ARMA processes with GARCH errors are analysed and compared with the properties of the individual returns series. Empirical application is made to the markets for non-ferrous metals on the London Metal Exchange (LME). The volatility of the LME Base Metals Index (LMEX) is modelled and compared with the volatility of the 3-month futures contracts for aluminium, copper, lead, nickel, tin, and zinc.

Suggested Citation

  • Watkins, Clinton & McAleer, Michael, 2005. "Related commodity markets and conditional correlations," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 68(5), pages 567-579.
    • Handle: RePEc:eee:matcom:v:68:y:2005:i:5:p:567-579
    DOI: 10.1016/j.matcom.2005.02.016
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    References listed on IDEAS

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    1. Ling, Shiqing & McAleer, Michael, 2002. "NECESSARY AND SUFFICIENT MOMENT CONDITIONS FOR THE GARCH(r,s) AND ASYMMETRIC POWER GARCH(r,s) MODELS," Econometric Theory, Cambridge University Press, vol. 18(3), pages 722-729, June.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    3. He, Changli & Terasvirta, Timo, 1999. "Properties of moments of a family of GARCH processes," Journal of Econometrics, Elsevier, vol. 92(1), pages 173-192, September.
    4. Ling, Shiqing & McAleer, Michael, 2002. "Stationarity and the existence of moments of a family of GARCH processes," Journal of Econometrics, Elsevier, vol. 106(1), pages 109-117, January.
    5. Franses, Philip Hans & Ghijsels, Hendrik, 1999. "Additive outliers, GARCH and forecasting volatility," International Journal of Forecasting, Elsevier, vol. 15(1), pages 1-9, February.
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    Cited by:

    1. John T. Cuddington & Arturo L. Va'squez Cordano, 2013. "Linkages between spot and futures prices: Tests of the Fama-French-Samuelson hypotheses," Working Papers 2013-09, Colorado School of Mines, Division of Economics and Business.
    2. Zhao, Yiran & Gao, Xiangyun & An, Haizhong & Xi, Xian & Sun, Qingru & Jiang, Meihui, 2020. "The effect of the mined cobalt trade dependence Network's structure on trade price," Resources Policy, Elsevier, vol. 65(C).

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