Volatility transmission across currencies and commodities with US uncertainty measures

Abstract

This paper uses the Multi-chain Markov Switching model (MCMS) conditioned on US uncertainty measures (VIX, VIX-oil and FSI) to examine the patterns of volatility transmission across the resource, major and safe haven currencies The results with and without the uncertainty variables generally identify three patterns of volatility transmission: interdependence, spillover and comovement. They reveal the dominance of interdependence over spillovers and comovements when the uncertainty variables are excluded, highlighting the significance of mutual reciprocity of individual market shocks over common shocks across the selected assets. Within portfolios of a two-variable framework (two variables representing two minimum variance portfolios (à la Markowitz), containing a weighted combination of the currencies and of the commodities, respectively), we find interdependence between the two portfolios with and without the VIX, a spillover from commodities to currencies in the case when the FSI is included and independence between the two portfolios in the case when the oil-VIX is accounted for. The implications of the results are important for the portfolio managers in selecting portfolios’ components during high oil volatility periods.