Exchange Rate and Industrial Commodity Volatility Transmissions, Asymmetries and Hedging Strategies

Abstract

This paper examines volatility, volatility spillovers, optimal portfolio weights and hedging for systems that include the dollar/euro exchange rate together with four important and highly traded commodities - aluminum, copper, gold and oil - by utilizing four symmetric and asymmetric multivariate GARCH and DCC models. The inclusion of exchange rate increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities in all the models. The model that includes copper displays more direct and indirect transmissions than the one that includes aluminum which displays the high interactions with oil. Optimal portfolio weights suggest that investors should hold more of aluminum, copper and gold and less of oil in those portfolios. Hedging ratios indicate that the most effective way of hedging long commodity and euro positions is shorting them with oil positions.MGARCH; shocks; volatility; transmission; asymmetries; hedging