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Estimating Network Connectedness of Financial Markets and Commodities

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Abstract

We investigate the directional volatility and return network connectedness among stock, commodity, bond, currency and cryptocurrency markets. The period of study covers Feb 2006 until August 2018. We utilize and expand Diebold and Yilmaz (2014 2015) connectedness measurement; accordingly, in the variance decomposition structure, we use Hierarchical Vector Autoregression (HVAR) to estimate high dimensional networks more accurately. Our empirical results show that markets are highly connected, especially during 2008–2009. Asian stock markets are the net receiver of shocks, while European and American stock markets are the net transmitter of shocks to other markets. The pairwise connectedness results suggest that among stock markets, DAX-CAC 40, FTSE 100-CAC 40 and S&P 500-S&P_TSX index are more integrated through connectedness than the others. For other markets, WTI crude oil — Brent crude oil, 30-Year bond and 10-Year bond, Dollar Index futures-EUR/USD have notable connections. In terms of cryptocurrencies, they contribute insignificantly to other markets and are highly integrated with each other. Gold and cryptocurrencies seem to be good choices for investors to hedge during a crisis.

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Acknowledgments

The authors would like to thank the anonymous reviewers for their time and effort. Their constructive comments and helpful suggestions helped us to clarify the main paper’s research contributions and improve its quality.

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Authors and Affiliations

  1. Financial Engineering Group, Faculty of Industrial Engineering, K. N. Toosi University of Technology, Tehran, Iran

    Ehsan Bagheri & Seyed Babak Ebrahimi

Authors
  1. Ehsan Bagheri
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  2. Seyed Babak Ebrahimi
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Correspondence to Seyed Babak Ebrahimi.

Additional information

Ehsan Bagheri received his M.S. degree in financial engineering from K. N. Toosi University of Technology. He earned his BSc in industrial engineering and embarked on his education with business and economic focus. During his postgraduate period, he has been recognized as one of the successful students in both theory and research. His research interests are in the field of risk assessment, econometrics, investment decision analysis and portfolio management.

Seyed Babak Ebrahimi is an assistant professor in Financial Engineering Department of Faculty of Industrial Engineering. He earned his MSc from Sharif University of Technology as a top student in the field of economics. During his undergraduate period, he was awarded as the best student in research in Industrial Engineering Department of Iran University of Science and Technology for three consecutive years. He was also the top young Iranian researcher in Science and Technology and was elected as the best Ph.D. graduate. His research interests include econometrics, microeconomics, time series analysis and pricing.

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Bagheri, E., Ebrahimi, S.B. Estimating Network Connectedness of Financial Markets and Commodities. J. Syst. Sci. Syst. Eng. 29, 572–589 (2020). https://doi.org/10.1007/s11518-020-5465-1

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