Working paper 639
Journal of International Financial Markets, Institutions and Money
This papers adopts the recently proposed realized Beta GARCH model of Hansen et al. (J. Appl. Econ. (2014)) to examine the changes in price and return dynamics that affected the commodity market during the 2007-2008 boom and bust. We provide evidence that, starting from
2006, realized correlations between agricultural commodities within the same group significantly increased. Moreover, the observed increase in correlations between agriculturals and oil was greater still. The dynamics of the volatility spillover across commodities are also investigated. It is found that spillover effects became more evident prior to the commodity price crash. However, this increase in volatility transmission tended to anticipate the increase in correlations. To conclude, it is shown that the size of a short position in oil required to hedge a long agricultural commodity position , given by the realized beta, therefore increased significantly.
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