Volatility Transmission between Oil and LME Futures

Abstract

This paper investigates the volatility transmission between oil and base metals to assess the possibility of hedge strategy across commodity markets. In order to identify the volatility linkage of oil to the base metals, the bivariate GARCH model is applied using daily returns data period over 2000-2016. It is found that evidence of volatility transmission between oil and base metals is somewhat strong with a 1% significant level. This result suggests the investment idea of commodity hedging strategy of cross-market is important.

Testing Efficiency of the London Metal Exchange: New Evidence

“…The results showed that LME's volatility was larger post-crisis when compared to pre-crisis. 4 Ewing and Malik (2013) found the linkage that existed between the volatilities in oil and gold, while Park (2018) found evidence of volatility transmission between oil and base metals thanks to the financialization of the commodity markets. This evidence suggests that there was a somewhat synchronized boom and bust cycle within the commodities.…”

Effect of Speculators’ Position Changes on the LME Futures Market

“…However, the long-only index funds might be beneficial, thanks to investments by speculators. Park (2018) found that the evidence of volatility transmission between oil and base metals was somewhat strong, with a 1% significant level. He argued that considering this result, the behavior of volatility in oil and LME futures prices applied to hedge decisions across the commodity market was useful.…”

The Role of Canceled Warrants in the LME Market

“…5 They found no evidence that the volatilities processes were fractionally cointegrated. Park (2018) provided evidence of volatility transmission between oil and the base metals through the bivariate GARCH model. Within the results, he argued that hedging decisions across the oil and LME futures were feasible to deal with market risk.…”

“…The LME (London Metal Exchange) 1 is the world's largest futures exchange in the metal industry, including for six base metals-copper, aluminum, lead, zinc, tin, and nickel-and is known for being quite correlated with the business cycle (Park 2018). Based on Bloomberg data, the LME is truly a global commodity exchange, as 95% of trades originate from overseas.…”