Volatility Spillover Between Commodities and Equities - a Study of Oil, Steel, and Cotton

Abstract

In the 21st century, there has been an increase in the investments in commodity markets. More investors have started to include commodities in their portfolios. The research on how commodity markets interact with other markets, like stock indices or other commodity markets, is extensive. However, there exists little research on volatility spillover between commodities and company stocks.

In this thesis the volatility spillover between three commodities and company stocks that might be related to each commodity is investigated. The commodities are oil, steel, and cotton. Eleven companies have been selected to analyze with oil, six companies with steel, and five companies with cotton. Daily closing prices for each asset is collected from January 2002 to April 2020. The generalized spillover index developed by Diebold and Yilmaz (2009; 2012) is used to calculate the overall and net spillover as an average over the entire period. In addition, a rolling overall spillover analysis is performed to see how the volatility spillover varies over time.

The results suggest that the companies that are analyzed with oil have the highest volatility spillover followed by steel and lastly cotton. The companies that are related to oil have a moderate volatility spillover for the entire period, while the spillover for steel and cotton is low. Further, the results suggest that the volatility spillover between commodities and company stocks varies over time, with spikes caused by both highly volatile times in the financial markets, and by company specific events.