A volatility spillover analysis between bond and commodity markets as an indicator for global liquidity risk

The aim of this study is to analyze the volatility spillover between bond and commodity markets in terms of global liquidity risk. The data covers daily closing prices of bond markets including Brazil, Russia, India, China, and Turkey (BRIC-T countries) and commodities such as gold and oil for the period from January 2008 to April 2017. We implemented DCC-GARCH model to analyze volatility spillover between these markets and Copula DCC-GACRH to determine dependence structures between them. Additionally, we applied Hong Causality in Variance Test to determine the direction of the causal relationships between these markets. Our empirical findings indicate the existence of significant volatility spillovers between gold and most of these bond markets including Brazil, Russia and Turkey and between oil and some of these bond markets including Russia and Turkey. Additionally, we observed dependence structures between gold and each of these bond markets as well as between oil and the others. We didn't observe shock dependency between gold and the bond markets. However, we observed shock dependency between oil and the bond markets of Brazil and Turkey. Finally, we determined a unidirectional causality in variance from Brazil bond market to gold and from gold to bond markets of Russia and Turkey. Additionally, we observed a unidirectional relationship between oil and all of these markets except for India. While the direction of this relationship is from oil to bond markets of Brazil and Turkey, it is opposite for the others. Our results indicate a limited diversification benefit for investors and portfolio managers. Keywords: Volatility Spillover, Bond Markets, Commodity Markets, DCC- GARCH, Copula DCC-GARCH, Hong Causality Test