Estimating Network Connectedness of Financial Markets and Commodities

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.

Keywords

Financial markets / network / connectedness / econometrics / commodity

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