Modelling time-varying volatility spillovers across crises : evidence from major commodity futures and the US stock market

Effective risk management requires discernment of volatility interaction patterns across assets. Our study examines the level of interconnectedness amongst nine major commodity futures across precious metals, energy, industrial and agricultural sectors and the US S&P 500 index from 1990 to 2022. Spillover indices are constructed by combining the Time-Varying Parameter (TVP)-Vector Autoregression (VAR)-Stochastic Volatility (SV) model with the DY- spillover index. We analyse the fluctuating dynamics of the extent and directionality of the volatility transmissions across various crises. Our results indicate that SPX is the largest net transmitter of volatility information, predominantly affecting crude oil, heating oil, and gold futures, with spillovers intensifying during crises. Gold futures receive heightened volatility transmissions during crises, alluding to the ‘‘flight to quality’’ characteristic displayed by investors. The COVID-19 crisis and the consequent supply chain disruptions uniquely heightened volatility transmissions from lumber to natural gas futures, unseen in previous economic crises. We posit that natural gas futures could be a viable asset for risk diversification as they show limited interaction with SPX and minimal within-sector transmissions with crude and heating oil futures. We substantiate our findings on potential hedge assets by constructing dynamic portfolio weights based on minimising pairwise volatility interactions between assets in the portfolio.