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Does the SDR stabilize investing in commodities?

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  • Jin, Jiayu
  • Han, Liyan
  • Xu, Yang

Abstract

This paper investigates the potential stabilizing power of the Special Drawing Rights (SDR) on global commodity markets. Using the VAR-BEKK-GRACH, we investigate the impacts of representative shocks from financial market, real economy and foreign exchange market on 25 commodities. Through comparing the volatility spillover on the US dollar-based and SDR-based commodity prices, we find that SDR pricing plays a significant role in stabilizing the prices volatility of energy, metal and agricultural commodities in response to shocks from S&P 500, Baltic Dry Index (BDI) and USDX, respectively. The stability effect on commodity prices varies across specific shocks and commodity varieties. More importantly, by conducting a hedging portfolio exercise in commodity market we show a dominant hedging effectiveness by SDR-denominated bonds to commodities investment compared with the US notes in all cases, except for metals facing S&P 500 shock. The results suggest an effective technique to hedge against commodity market volatilities by combining the SDR-denominated instrument.

Suggested Citation

  • Jin, Jiayu & Han, Liyan & Xu, Yang, 2022. "Does the SDR stabilize investing in commodities?," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 160-172.
    • Handle: RePEc:eee:reveco:v:81:y:2022:i:c:p:160-172
    DOI: 10.1016/j.iref.2022.05.005
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