Return and volatility co-movement in commodity futures markets: the effects of liquidity risk |
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Authors: | Yongmin Zhang Shusheng Ding |
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Affiliation: | 1. School of Business, Ningbo University , 818 Fenghua Road, Ningbo, 315000, China;2. Nottingham University Business School China, Centre for Global Finance, University of Nottingham Ningbo China , 199 Taikang East Road, Ningbo, 315100, China yminzhang27@163.com;4. Nottingham University Business School China, Centre for Global Finance, University of Nottingham Ningbo China , 199 Taikang East Road, Ningbo, 315100, China |
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Abstract: | Commodity markets are a widely researched topic in the field of finance. In this paper, we investigate the co-movement of return and volatility measures in different commodity futures markets and how these measures are affected by liquidity risk. First, we find that commodity returns display co-movement and that liquidity risk plays a key role in shaping asset return patterns. Moreover, we show that the volatilities of commodity returns co-move, and we demonstrate the role of liquidity risk in this joint pattern. We also find that the commodity markets we investigated share a common volatility factor that determines their joint volatility co-movement. Because liquidity risk affects both commodity returns and volatility shocks, it might be interpreted as the common causal factor driving both measures simultaneously. Therefore, we affirm the view that liquidity shocks are firmly related to two residual risks originating from both market return and market volatility. Finally, we also show that liquidity spillovers can significantly drive cross-sectional correlation dynamics. |
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Keywords: | Commodity futures markets Price co-movement Liquidity effects Volatility co-movement |
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