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We examine how implied and contemporaneous equity market volatility influence gold, silver, and oil commodities futures returns. Our measure of implied volatility is the VIX index, and the measure of contemporaneous volatility uses aggregated squared intraday S&P 500 index returns. We find that Gold and silver futures returns respond to changes in implied, but not contemporaneous, volatility in a manner consistent with their properties as a safe haven. Oil has a statistically negative response to implied volatility and a marginally negative response to contemporaneous volatility. These effects are amplified during recessionary periods and robust after controlling for a dollar index.
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INTRODUCTION
Gold, silver, and oil play a role in the real sector as commodities, and in the financial sector, as investment vehicles. Studies have shown that they have hedging properties with financial assets in general and equities in particular (Jaffe (1989), Giamouridis & Tamvakis (2001), and McCown & Zimmerman (2010), for example). Further work has explored the reaction of financial markets to commodity shocks (Nandha & Faff (2008), Nandha & Brooks (2009), and Mohanty & Nandha (2011), for example). Recently, Qadan & Yagil (2012) found that equity volatility leads gold returns. Beyond that, however, there is a relative dearth of studies that analyze the impact of equity market volatility on these commodities. If investors intend to use gold, silver, or oil as equity market hedges, it is important to understand the extent and timing of this impact.
While precious metals and oil have always had an exceptionally large number of industrial applications throughout the economy as a whole, these commodities have received increased scrutiny from investors over the past decade. For example, $47 billion of commodity Exchange Traded Funds (ETFs) were issued between 2008 and 2010.1 These commodities have evolved into substitutes for equity products. Commodities (and particularly commodities futures) now serve as potential hedges from inflationary pressures; portfolio constituents for diversification opportunities; and (potentially) monetary substitutes in the event of economic turmoil. Given the myriad uses and applications for these commodities, it is critical to understand their return generating process, particularly by examining the extent to which their returns series are influenced by equity market volatility.
Our paper examines the relationship between two types of equity volatility...