Modelling Time-Varying Volatility Spillovers Across Crises: Evidence from Major Commodity Futures and the Us Stock Market

We model time-varying volatility spillovers amongst nine major commodity futures and the US S&P 500 index from 1990 to 2022. Spillover indices are constructed by combining the TVP-VAR-SV[1] model with the DY-spillover index. We analyze the fluctuating dynamics of the extent and directionality of the volatility transmissions across various crises ranging from the Asian Financial crisis, the Global financial crisis and the COVID-19 pandemic-induced crisis. Our findings show that SPX is the largest net transmitter of volatility information, transmitting predominantly to crude oil, heating oil and gold futures, with spillovers exacerbating during crises. Gold futures receive heightened volatility transmissions during crises, alluding to the 'flight to quality' characteristic displayed by investors. Unlike other energy futures, natural gas futures do not interact significantly with SPX. They also do not have any significant within-sector transmissions with crude and heating oil futures. We posit that natural gas futures could be a viable asset for risk diversification. The pandemic-induced crisis and the consequent supply chain disruptions uniquely heightened volatility transmissions from lumber to natural gas futures, unseen in previous crises. Our findings are essential for discerning levels of interconnectedness, which is crucial for effective risk diversification strategies. [1] Time-Varying Parameter- Vector Auto regression model with Stochastic Volatility