Volatility linkages between stock and commodity markets revisited: Industry perspective and portfolio implications

This study investigates volatility linkages and risk management in stock and commodity markets at the sectoral level. Static and dynamic correlations consistently reveal a high level of co-movement in the stock market, unstable and generally weak dynamic correlations both in commodity sectors and across the two markets. Motivated by the dynamic connectedness, we explore the hedging effectiveness between stock and commodity returns and find that the adopted commodity indices can successively serve as diversifiers to alternative sectors in the US stock market, and vice versa. Furthermore, spillover networks indicate that the volatility spillover effects between the sectoral stock and commodity markets are negligible, whereas strong bidirectional spillover exists for different sectors in the US stock market, which echo the contemporaneous volatility linkages. We also extend our results by employing several representative stock and commodity futures, constructing spillover indices based on the TVP-VAR model, and conducting a wide range of robustness checks.