VIX, Gold, Silver, and Oil: How do Commodities React to Financial Market Volatility?

Transcription

1 VIX, Gold, Silver, and Oil: How do Commodiies Reac o Financial Marke Volailiy? Daniel Jubinski Sain Joseph s Universiy Amy F. Lipon Sain Joseph s Universiy We examine how implied and conemporaneous equiy marke volailiy influence gold, silver, and oil commodiies fuures reurns. Our measure of implied volailiy is he VIX index, and he measure of conemporaneous volailiy uses aggregaed squared inraday S&P 500 index reurns. We find ha Gold and silver fuures reurns respond o changes in implied, bu no conemporaneous, volailiy in a manner consisen wih heir properies as a safe haven. Oil has a saisically negaive response o implied volailiy and a marginally negaive response o conemporaneous volailiy. These effecs are amplified during recessionary periods and robus afer conrolling for a dollar index. INTRODUCTION Gold, silver, and oil play a role in he real secor as commodiies, and in he financial secor, as invesmen vehicles. Sudies have shown ha hey have hedging properies wih financial asses in general and equiies in paricular (Jaffe (1989), Giamouridis & Tamvakis (001), and McCown & Zimmerman (010), for example). Furher work has explored he reacion of financial markes o commodiy shocks (Nandha & Faff (008), Nandha & Brooks (009), and Mohany & Nandha (011), for example). Recenly, Qadan & Yagil (01) found ha equiy volailiy leads gold reurns. Beyond ha, however, here is a relaive dearh of sudies ha analyze he impac of equiy marke volailiy on hese commodiies. If invesors inend o use gold, silver, or oil as equiy marke hedges, i is imporan o undersand he exen and iming of his impac. While precious meals and oil have always had an excepionally large number of indusrial applicaions hroughou he economy as a whole, hese commodiies have received increased scruiny from invesors over he pas decade. For example, $47 billion of commodiy Exchange Traded Funds (ETFs) were issued beween 008 and These commodiies have evolved ino subsiues for equiy producs. Commodiies (and paricularly commodiies fuures) now serve as poenial hedges from inflaionary pressures; porfolio consiuens for diversificaion opporuniies; and (poenially) moneary subsiues in he even of economic urmoil. Given he myriad uses and applicaions for hese commodiies, i is criical o undersand heir reurn generaing process, paricularly by examining he exen o which heir reurns series are influenced by equiy marke volailiy. 70 Journal of Accouning and Finance vol. 13(1) 013

2 Our paper examines he relaionship beween wo ypes of equiy volailiy and hree commodiies fuures reurns. Specifically, we examine he exen o which "implied" volailiy (as measured by he CBOE VIX index) and "conemporaneous" volailiy (consruced as an aggregaion of inraday S&P 500 squared reurns) relae o gold, silver, and oil fuures reurns. We find saisically and economically relevan relaionships beween gold and silver fuures reurns and implied, bu no conemporaneous, volailiy. We find a saisically significan and negaive relaionship beween oil fuures reurns and implied volailiy, and a marginally saisically significan negaive relaionship beween oil fuures reurns and conemporaneous volailiy. Our findings suppor he view of gold as a safe haven; oil as an inflaion hedge; and silver as a pure commodiy. LITERATURE REVIEW Many sudies have examined he poenial for gold as a hedge for equiy invesmens. Jaffe (1989) finds ha gold iself had a correlaion close o zero wih common socks, while gold company socks had a posiive correlaion wih US socks overall, over he period Gold and gold socks boh had a posiive correlaion wih he EAFE index. Faugère & Van Erlach (005) show a relaion beween he real price of gold, exchange raes, and equiy reurns (measured by a global equiy P/E raio). Hillier, Draper & Faff (006) show ha gold and silver had negaive beas o he S&P 500 over he period They also find ha gold was negaively correlaed wih he S&P 500 when realized sock marke volailiy (as measured by sandard deviaion of daily reurns) was more han wo sandard deviaions from he mean. The economic impac, however, was small. Similarly, McCown & Zimmerman (010) find negaive and significan beas for he risk premium of gold and he risk premium on US socks (as measured by he MSCI Index minus he 30-day T-bill yield) for wo- and five-year periods, and for silver over five-year periods, from This resul was, however, driven largely by he significance of he beas for he period. Several recen papers differeniae beween gold as a safe haven and gold as a hedge. Baur & McDermo (010) and Baur & Lucey (010) define gold as a safe haven because i is uncorrelaed wih financial asses during crises, bu also as a hedge because is reurns are posiive on average when financial asse reurns are negaive. Baur & McDermo (010) use a GARCH (1,1) model and find ha he reurn of gold is negaive and significanly relaed o periods of high volailiy, as measured by condiional volailiy of an index of developed and emerging sock markes compiled by DaaSream. They show ha gold is also a safe haven for US socks during he hree financial crises in 1987, 1997, and 008. Sari, Hammoudeh & Soyas (010) also idenify gold as a safe haven. Ciner, Gurdgiev & Lucey (010) find ha gold has a low correlaion wih he dollar and equiies during periods of marke disress, and ha oil has also exhibied safe haven properies in he pas five years. More recen work has incorporaed volailiy of he commodiies hemselves as well as equiy volailiy ino various economeric specificaions. Baur & Lucey (010) use asymmeric GARCH o show ha gold has a negaive and significan relaion o equiies in bear markes, bu no in bull markes. Giamouridis & Tamvakis (001) esimae an EGARCH specificaion (Nelson (1991)) using he Goldman Sachs and JP Morgan Commodiy Indices o find ha commodiy reurns in general display asymmeric volailiy. They also find rising volailiy in falling sock markes, and vice versa. Baen, Ciner & Lucey (010) use a monhly VAR model and find ha gold volailiy does no respond o changes in equiy volailiy, bu is insead sensiive only o moneary variables during he period of From , however, gold volailiy does have a posiive relaion o equiy volailiy. The volailiy of silver is no sensiive o eiher financial or moneary shocks in eiher period. Sari, Soyas & Hacihasanoglu (011) use a VAR model o examine he relaion beween VIX, oil, and meals. Using VIX as a proxy for global risk percepions, hey find ha gold, exchange raes, and VIX lead oil prices. VIX and oil were negaively relaed. VIX had an economically significan long run effec on oil, gold, and silver, and was iself affeced by oil and silver in he long run. Mos oher sudies analyzing he relaion beween oil and equiies o dae have focused on equiy as he dependen variable (Nandha & Faff (008), Nandha & Brooks (009), and Mohany & Nandha (011), for example). Journal of Accouning and Finance vol. 13(1)

3 Ohers have examined he ineracion beween oil and he precious meals. Hammoudeh & Yuan (008) find persisen volailiy effecs of oil shocks (as well as ineres rae shocks) on boh gold and silver. These effecs are long-lasing, as indicaed by significan persisence in EGARCH (,) and GARCH (,) models. In conras o previous sudies, hey find no evidence of volailiy asymmery in heir sudy. Prior work suggess a relaion beween financial marke volailiy (boh implied and realized) and commodiies. The conribuion of his paper is o idenify a significan relaion beween anicipaed financial marke volailiy and gold, silver, and oil. This relaion is robus o dollar and recessionary effecs, and surpasses any reacion o realized equiy volailiy. DATA AND METHODS Daa Our dependen variables are he daily coninuously compounded reurns on hree fuures series: Wes Texas Inermediae (WTI) crude oil, gold and silver. We obained daily NYMEX prices for hese series over he January, 1990 hrough December 31, 010 ime period from FacSe. There are a oal of 5,90 observaions per series. Our measure of implied equiy volailiy is he CBOE Volailiy Index, or VIX. The VIX is derived from he volailiy implied from he prices of opions on he S&P 500 Index. Becker, Clemens & Whie (007) show ha he VIX conains informaion abou boh pas and fuure jump aciviy, and herefore has a significan relaion o realized and fuure volailiy. We obained daily VIX daa from he CBOE websie from January, 1990 hrough December 31, 010. If meals serve as a safe haven, we would expec he VIX o have a significan and posiive impac on gold and silver (Baur & Lucey (010)). Conversely, we expec VIX and oil o have a negaive relaionship, indicaing is role as an inflaion hedge (Sari, Soyas & Hacihasanoglu (011)). To consruc our measure of conemporaneous volailiy, described in more deail below, we obained inraday S&P 500 Index from Tickdaa, Inc. for he sample period. We sum he coninuously compounded log 30-minue reurns wihin each individual day o consruc he measure of inraday volailiy. Since he VIX is fundamenally a smoohed measure of volailiy, we subsequenly filer he resuling conemporaneous volailiy series using an exponenially weighed moving average (EWMA) mehod. As wih anicipaed volailiy, we expec conemporaneous volailiy o have a posiive relaion o gold and silver, bu a negaive relaion o oil. Oher sudies, including Baur & McDermo (010), Sari, Hammoudeh & Soyas (010), and Ciner, Gurdgiev & Lucey (010), among ohers, argue ha gold possesses "safe haven" properies during imes of economic or financial disress. In order o invesigae such safe haven properies among all of our commodiies series, we obain recession daa from he NBER. 3 We hen consruc a dummy variable for he recession periods in our sample. There are hree recessionary cycles (1990 o 1991, 001, and 007 o 009) idenified in he January 1990-December 010 period. A oal of 709 (13.4%) of he 590 observaions (per commodiy series) fall wihin an NBER-daed recession. If gold and silver ac as "safe havens" in he even of economic crisis, we would expec heir reurns series o exhibi an addiional, posiive, relaionship during an NBER-daed recession. If oil is an inflaion proxy, is reurns should be increasing in expansions and decreasing during recessions. Our final independen variable is a dollar index. Previous sudies, including Faugere and Van Erlach (005); Tully & Lucey (007); and Ciner, Gurdgiev & Lucey (010) find a saisically significan relaionship beween commodiies fuures reurns and exchange raes. Hammoudeh, Yuan, McAleer & Thompson (010) show ha gold volailiy is sensiive o changes in he dollar/euro exchange rae: a falling dollar raises gold and silver individual and cross-volailiy. Lizardo & Mollick (010) Lizardo and Mollick (010) show ha he dollar rises agains oil exporing counries currencies and falls agains imporing counries currencies when here are oil shocks. We use he Major Currencies Trade Weighed US Dollar Index of he Board of Governors of he Federal Reserve, obained from he Federal Reserve Bank of S. Louis FRED economic daabase. I is consruced as a rade-weighed average of he value of 7 Journal of Accouning and Finance vol. 13(1) 013

4 he dollar agains a variey of currencies including he Euro; Japanese yen; he Briish pound; and four ohers. 4 To he exen ha gold, silver, and oil have hedging properies, we would expec o see a saisically negaive relaionship beween his dollar index and he fuures reurns. TABLE 1 DESCRIPTIVE STATISTICS OF COMMODITY FUTURES RETURNS, EQUITY VOLATILITY, AND THE DOLLAR Panel A: Full Sample Variable Mean Median Sd Dev Min Max r GOLD, r SILVER, r OIL, VIX DOLLAR SPVOL, Panel B: Recession Only Variable Mean Median Sd Dev Min Max r GOLD, r SILVER, r OIL, VIX DOLLAR SPVOL, Noe: Descripive saisics for he percenage reurns of gold, oil, and silver, measured as 100ln(P /P -1 ); implied volailiy measured by he CBOE VIX Index; a rade-weighed average of he value of he dollar agains a variey of currencies including he Euro, Canadian dollar, Japanese yen, and he Briish pound, among ohers, obained from he S. Louis Fed FRED Daabase; and conemporaneous equiy volailiy measured by he summaion of coninuously compounded log 30-minue S&P 500 reurns across an individual day, filered using an exponenially weighed moving average (EWMA) mehod. Tables 1 and display descripive saisics and correlaions for he full sample (Panel A of each able) and for he subsample of observaions ha occur during and NBER-daed recession (Panel B of each able). In Table 1, Panel A, all hree commodiies exhibi posiive reurns on average during he full 1990 hrough 010 ime period. From Panel B, we see ha average reurns for oil and silver decrease o %, and %, respecively, during he hree recessionary periods of 1987, 001, and In conras, gold fuures reurns decrease, bu he poin esimae remained posiive a 0.018%, even in recessionary imes. This gives preliminary evidence ha gold appears o possess some degree of "safe haven" properies, while oil and silver appear o be inflaion hedges during recessions. Based on he full sample median values of 0.000, 0.064, and for gold, silver, and oil, respecively, we conclude ha gold reurns are posiively skewed, while silver and oil are negaively skewed. During he recessions, all hree commodiies exhibi negaive skewness. The average daily change in implied volailiy, measured by he VIX, was over he full sample period, bu increased o during recessions, consisen he view ha he VIX is a measure of fear in he financial markes, and he endency of he VIX o increase during financial and economic crises. 5 Our realized volailiy measure doubled from over he full sample ime span o 0.09 in imes of Journal of Accouning and Finance vol. 13(1)

5 recession. Implied volailiy was negaively skewed in he full sample, bu posiively skewed during recessions, while he realized volailiy measure exhibied he opposie behavior. Variable r GOLD, r SILVER, r OIL, VIX DOLLAR SPVOL, 0.5 Variable r GOLD, r SILVER, r OIL, VIX DOLLAR TABLE CORRELATIONS FOR COMMODITY FUTURES RETURNS, EQUITY VOLATILITY, AND THE DOLLAR r GOLD, SILVER, Panel A: Full Sample r VIX r OIL, *** 0.33*** 0.056*** *** 0.001*** r GOLD, SILVER, *** *** *** *** *** *** *** Panel B: Recession Only r VIX r OIL, *** 0.094** *** 0.348*** 0.091*** ** *** *** *** * *** *** * -0.14*** *** 0.107*** SPVOL, Pearson correlaions beween he reurns of gold, oil, and silver, measured as ln(p /P -1 ); implied volailiy measured by he CBOE VIX Index; a rade-weighed average of he value of he dollar agains a variey of currencies including he Euro, Canadian dollar, Japanese yen, and he Briish pound, among ohers, obained from he S. Louis Fed FRED Daabase; and conemporaneous equiy volailiy measured by he summaion of coninuously compounded log 30-minue S&P 500 reurns across an individual day, filered using an exponenially weighed moving average (EWMA) mehod. The null hypohesis was H 0 : = 0., 0.5 DOLLAR DOLLAR SPVOL SPVOL, 0.5 Table, Panels A and B, reveal ha gold is posiively correlaed wih boh of our measures of volailiy over he full sample ime span. The correlaion of gold fuures reurns wih he VIX is over he full sample and increases o during recessions. The poin esimaes are very close o zero, bu are saisically posiive a he 1% level. The increase in he correlaion from he full sample o he recessionary sample could be addiional evidence ha gold is perceived as a safe haven, wih invesors graviaing o gold when hey perceive he fuure equiy marke volailiy will increase. The correlaion of gold wih he conemporaneous volailiy measures is 0.001, decreasing dramaically in imes of recession o While hese values are saisically differen from zero a he 1% significance level, hey are very small in an economic sense, which reinforces he noion ha gold is viewed as a safe haven by invesors in response o increases in equiy marke volailiy. Volailiy, boh implied and realized, is negaively correlaed wih oil, also a he 1% level of significance in he full sample and in he recessionary periods. These correlaions for oil also increase (in an absolue value sense) during recessions. The change in he dollar index is negaively correlaed wih all hree commodiies, alhough is significance diminishes from he 1% level o he 5% and 10% level for gold and oil, respecively, during recessions. Ineresingly, he correlaion beween he dollar and he VIX are close o zero, and highly significan in boh samples, bu is no significan for conemporaneous volailiy in eiher period. 74 Journal of Accouning and Finance vol. 13(1) 013

6 The Basic GARCH Model The following AR1-GJR-GARCH(1,1)~ model is esimaed using he aforemenioned daily coninuously compounded fuures reurns, r : r r Suden ~ 0,, P where r is he percenage reurn for a paricular fuures series from dae -1 o or r 100 ln, P 1 and P denoes he closing price on day. 6 In (1), above, 0 is a consan, 1 is he AR1 coefficien, is he informaion se as of ime, and Suden denoes he condiional Suden- disribuion 7 : (1) / 1 1 () where is he degrees of freedom in he -disribuion and >. The model for he condiional variance, is he asymmeric GJR-GARCH model of Glosen, Jagannahan & Runkle (1993):, I1 (3) where I if and 0 oherwise All of he forhcoming resuls are obained using Quasi Maximum Likelihood mehods. We also repor robus sandard errors (see Bollerslev & Wooldridge (199)). All of he commodiy variables, he dollar index, he VIX variable, and S&P 500 reurns are deseasoned using he wo-sep process similar o ha originally proposed by Gallan, Rossi & Tauchen (199). The commodiies, dollar index and he VIX variable are regressed on a marix of dummy variables and a ime rend. The residuals are hen re-scaled o have he same mean and variance of he original series for he subsequen analysis. 9 Models Incorporaing Equiy Volailiy and Commodiies We explore he effec of he VIX index and S&P 500 volailiy on commodiies during he sample period in several differen ways. The firs hypohesis is ha gold, silver, and oil reurns are relaed o changes in implied equiy volailiy. We expec ha gold and silver prices should be posiively relaed o he VIX, as invesors seek he safey of gold in anicipaion of rising equiy marke risk. If oil acs as an inflaion proxy, hen we would expec a decline in oil prices in response o rise in anicipaed volailiy in equiies. The GARCH Model wih Implied Volailiy Our firs hypohesis is ha precious meal reurns should be posiively relaed o increases in equiy volailiy. For gold, his would be due o is safe haven propery; for silver, i would be due o is value as a precious meal, and as a "second bes" safe haven. For oil, on he oher hand, we expec a negaive relaion, consisen wih Sari, Soyas & Hacihasanoglu (011) conjecure of rising volailiy depressing global demand. To es hese hypoheses, we modify Equaion (1) o include implied volailiy by adding he change in he VIX index ha occurs beween daes -1 and, or VIX : r r VIX (4) Journal of Accouning and Finance vol. 13(1)

7 Tully & Lucey (007) use a power GARCH model o show ha he value of gold and gold fuures is more dependen on he level of he US dollar (inversely) han on Briish equiy reurns, he Briish pound, US ineres raes, or (UK) inflaion. In fac, heir dollar series was he only series ha had a saisically significan relaionship wih gold reurns. They also find ha gold volailiy, on he oher hand, is largely deermined by prior period gold volailiy iself. This was rue boh overall and during he crisis periods of 1987 and 001. To es he degree o which (or if) our commodiies fuures are influenced by he dollar exchange rae, we modify Equaion (4) o include our rade weighed dollar index, discussed above, and esimae he following model: r r VIX DOLLAR (5) As an addiional es of he safe haven hypohesis, we add an ineracion erm for recession wih he VIX as defined he NBER. We include an ineracion erm for he recession and he dollar index, o conrol for possible differences as indicaed by he correlaion changes in Table. r r VIX VIX RECESSION DOLLAR DOLLAR RECESSION 1 13 (6) where RECESSION is a dummy variable akes on a value of one if a paricular day in he sample falls wihin an NBER-daed recession. The GARCH Model wih Conemporaneous Volailiy The second hypohesis is ha gold, silver, and oil are each relaed o conemporaneous equiy volailiy. The relaion of reurns o conemporaneous volailiy changes should be posiive for he precious meals and negaive for oil. Invesors who do no anicipae equiy volailiy would inegrae curren equiy marke changes by increasing heir demand for safer asses such as gold and silver, while reducing demand for more volaile commodiies, such as oil. To es his hypohesis, our second model subsiues conemporaneous S&P 500 index volailiy ino Equaions (4), (5), and (6) as follows: r r SPVOL , 0.5 (7) where SPVOL, 0.5is a realized volailiy measure consruced using high frequency inraday index reurns and smoohed using an Exponenially Weighed Moving Average (EWMA) mehod. 10 Andersen, Bollerslev, Diebold & Labys (001), Andersen, Bollerslev, Diebold & Labys (003), and Andersen, Bollerslev & Meddahi (004) consruc daily volailiy series by summing squared inraday reurns over he course of a rading day. Volailiy esimaes made using such mehods have been shown o be more economerically efficien and less noisy han esimaes obained using squared (or he absolue value of) daily reurns. 11 We follow Becker, Clemens & Whie (007) and use an aggregaion of 30-minue S&P 500 squared log-reurns as our iniial esimae of conemporaneous volailiy, including he overnigh reurn as he firs inraday reurn in order o capure he full variaion over he full day. The VIX is fundamenally an average of volailiy across rading days. In order o make our measure of conemporaneous volailiy more "on par" wih he VIX, we smooh our measure of conemporaneous volailiy using an Exponenially Weighed Moving Average (EWMA) mehod. Consrucing a EWMA series involves combining values of he original series and pas values of he EWMA series, or: SPVOL SPVOL 1 SPVOL, 1, 1 (8) 76 Journal of Accouning and Finance vol. 13(1) 013

8 where is a smoohing parameer consrained o lie on he inerval [0,1], SPVOL, is he EWMA value of he series, and SPVOL is he non-ewma value of he series (i.e. he value found by aggregaing he inraday log squared reurns of he index). We use a value of =0.5, SPVOL, 0.5in he forhcoming analysis, alhough our resuls are no sensiive o he acual choice of. 1 The GARCH Model wih Conemporaneous and Implied Volailiy The final hypohesis is ha he commodiy reurns are relaed o a combinaion of changes in boh implied and conemporaneous equiy volailiy. Implied volailiy is a predicor of realized volailiy, bu here is a possibiliy ha invesors will reac differenly o he differen signals sen by implied and conemporaneous volailiies. The inabiliy o incorporae he informaion signals wih perfec efficiency could resul in a differenial effec on reurns by he wo differen measures of equiy marke volailiy. The nex specificaion, Equaion, combines he models presened in Equaions and above: r r VIX DOLLAR SPVOL , 0.5 (9) Our final model incorporaes he model from equaion (9) and our RECESSION dummy variable discussed above: r r VIX VIX RECESSION DOLLAR DOLLAR RECESSION 1 13 SPVOL SPVOL RECESSION 3, 0.5 4, 0.5 (10) We urn now o a discussion of he resuls ha are obained by esimaing he economeric specificaions deailed above. RESULTS Relaion of Commodiies wih Implied Volailiy As repored in Table 3, he poin esimaes (sandard errors) on our implied equiy volailiy are: (0.007) for gold and (0.01) for silver. The poin esimae for he gold series is saisically posiive a he 1% level, while he silver series is saisically posiive a he 5% level. These resuls provide suppor for a fligh-o-qualiy argumen for gold and silver, in ha an anicipaed increase in equiy volailiy precedes higher daily fuures prices, and subsequen reurns, in gold and silver. Conversely, he esimaed coefficien (sandard error) on oil is (0.0), and is saisically negaive a he 5% level. However, he oil price sensiiviy is more economically significan han he meals resul, as a one-day decrease of 0.4% (he average change in he VIX over our sample period, as shown in Table 1) would resul in an annualized increase in oil prices of six basis poins. 13 The meals reurns also exhibi mean reversion, as evidenced by saisically negaive poin esimaes on he AR1 coefficiens. The poin esimae (sandard error) of he gold series is (0.013) and is saisically negaive a he 5% level, while he poin esimae (sandard error) of he silver series is (0.013) and is saisically negaive a he 1% level. The poin esimae on he oil series is , bu wih a sandard error of is no saisically differen from zero, indicaing no evidence of mean reversion. Journal of Accouning and Finance vol. 13(1)

9 TABLE 3 PARAMETER ESTIMATES FOR CHANGES IN COMMODITIES FUTURES RETURN VERSUS CHANGES IN IMPLIED EQUITY VOLATILITY I1 Series Name Gold Silver Oil 0 0 (x100) 1 (x100) (x10 5 ) r r VIX ~ Suden 0, * ** (0.013) 0.050*** (0.007) 0.01** (0.004) 0.016*** 0.948*** 0.04*** (0.005) 4.06*** (0.49) 0.048** (0.016) *** (0.013) 0.033** (0.01) 0.064** (0.01) 0.014*** 0.953*** 0.03*** (0.005) 4.130*** (0.45) VIX 0.049* (0.06) (0.014) ** (0.0) 0.363*** (0.09) 0.041*** (0.007) 0.934*** (0.007) *** (0.589) NOTE: r is he daily coninuously compounded reurn for he fuures series, denoes he day-o-day change 1 3 in he CBOE VIX index. Sandard errors are in parenhesis and *, **, and *** denoe saisical significance a he 10%, 5% and 1% percen levels, respecively. All hree of he series display srong evidence of GARCH effecs: he individual poin esimaes of he esimaed γ 1 and γ coefficiens are saisically posiive a he 1% level for all hree of our series. The gold and silver reurns series (bu no he oil reurns series) display evidence of asymmeric volailiy. The γ 3 poin esimaes for he gold and silver series are 0.04 wih a sandard error of and 0.03 wih a sandard error of 0.005, respecively. Boh he gold and silver γ 3 poin esimaes are saisically posiive a he 1% level, indicaing ha precious meal volailiies responds more srongly o "bad news" han "good news" in heir respecive markes. The lepokuric disribuion is suppored in he economeric specificaion, as he esimaed degrees of freedom of he -disribuion is saisically significan a he 1% level for all of he fuures series. Table 4 presens esimaion resuls wih he inclusion of a dollar index as a conrol variable. As expeced, we find a saisically negaive relaionship beween his index and our hree reurns series. The poin esimaes (sandard errors) of his coefficien, 1, are (0.06) for gold; (0.045) for silver; and (0.063) for oil. All hree of hese poin esimaes are saisically negaive a he 1% level. The implicaion is ha a falling dollar increases he reurns of all hree commodiies, which is consisen wih Hammoudeh, Yuan, McAleer & Thompson (010) and Sari, Soyas & Hacihasanoglu (011). Including he dollar index variable does no, from a saisical sandpoin, change our resuls from Table 3; he oher parameers for gold and oil are largely unaffeced by he inclusion of he dollar index. 78 Journal of Accouning and Finance vol. 13(1) 013

10 TABLE 4 PARAMETER ESTIMATES FOR CHANGES IN COMMODITIES FUTURES RETURN VERSUS CHANGES IN IMPLIED EQUITY VOLATILITY AND THE DOLLAR I1 Series Name Gold Silver Oil 0 0.0** 0.047** 0.051* (0.016) (0.06) *** (0.01) (x100) 0.04*** (0.007) *** (0.06) (x10 5 ) 0.04*** 1 3 r r VIX DOLLAR ~ Suden 0, *** 0.941*** 0.08*** 4.010*** (0.38) *** (0.013) (0.01) *** (0.045) 0.095*** (0.06) 0.015*** 0.949*** 0.03*** (0.005) 4.11*** (0.53) (0.014) -0.07*** (0.01) *** (0.063) 0.409*** (0.104) 0.041*** 0.933*** (0.010) 6.497*** (0.79) NOTE: r is he daily coninuously compounded daily reurn for he fuures series, VIX denoes he day-o-day change in he CBOE VIX index. DOLLAR denoes he coninuously compounded reurn on he rade weighed dollar index agains oher major currencies. Sandard errors are in parenhesis and *, **, and *** denoe saisical significance a he 10%, 5% and 1% percen levels, respecively. For example, he GARCH coefficiens are all sill saisically posiive a he 1% level for all hree commodiies. The volailiy asymmery erm is saisically posiive a he 1% level for he gold and silver series, and is sill no saisically significanly differen from zero for oil. Mean reversion is sill presen in he gold and silver reurns series, bu no in he oil series. The bigges difference we observe upon including he dollar index involves he esimaed coefficien on he VIX variable for he silver series. This coefficien is now wih a sandard error of 0.01, and is no longer saisically significan. This migh sugges ha silver behaves as more of a dollar proxy wih respec o financial marke volailiy han do gold or oil. The esimaed coefficiens for silver and oil are very similar o he ones obained wihou he dollar index. The esimaed for gold is 0.04 and is saisically significan a he 1% level. The esimaed for he oil series is now and, wih a sandard error of 0.01, is saisically negaive a he 1% level, as opposed o he 5% level in he previous model. Table 5 displays esimaion resuls for equaion (6), which incorporaes he recession dummy. 14 Including he recession dummy variable does no significanly aler our resuls wih respec o changes in implied volailiy. The esimaed coefficiens for all hree commodiies series are slighly smaller (in Journal of Accouning and Finance vol. 13(1)

11 absolue erms) in his model relaive o he resuls presened in Table 4 wihou he recession dummy. However, he saisical significance of he coefficiens are largely unaffeced. The coefficiens (sandard errors) for he hree series are: 0.037, (0.014), and (0.03) for gold, silver, and oil, respecively. 15 The poin esimae for he gold series is saisically posiive a he 1% level; he poin esimae for he silver series is no saisically differen from zero; and he poin esimae for he oil series is saisically negaive a he 5% significance level (as opposed o he 1% level in Table 4). The esimaed 4 coefficiens furher confirm ha he impac of implied volailiy on he precious meals series is insensiive o wheher or no he economy is in a recession. Neiher gold nor silver have esimaed 4 ha are saisically differen from zero, which furher suppors gold as a senimen indicaor more han an economic one. For oil, on he oher hand, boh of he recession erms are significan. The coefficien on he dollar index and recession erm equals and is saisically significan a 1%. The sae of he economy does have a measurable effec on he VIX/oil relaion. The esimaed 4 coefficien for he oil series is -0.16, and is saisically significan a he 10% level. The inverse relaionship wih oil and implied volailiy is consisen wih a view of oil as an inflaion proxy: when he economy is in recession (indicaor = 1), oil has a more negaive response o rising marke volailiy, while a srong economy (indicaor = 0) moderaes he response of oil prices o financial marke shocks. Boh he dollar index and he corresponding ineracion erm for he dollar index and recession were negaive and significan a he 1% level (as was he dollar index in Table 4) for all he commodiies. While he relaion beween implied equiy volailiy and gold, silver, and oil holds regardless of he sae of he economy, i is clear he dollar also plays a role. GARCH effecs are presen, posiive, and saisically significan a he 1% level for all hree commodiies. The significance and magniude of he GARCH effecs is approximaely he same as wihou he dollar index and wihou he recession erms. The lepokuric disribuion is suppored in he economeric specificaion, as he esimaed degrees of freedom parameer of he -disribuion is saisically significan a he 1% level for all of he indexes. 80 Journal of Accouning and Finance vol. 13(1) 013

12 TABLE 5 PARAMETER ESTIMATES FOR CHANGES IN COMMODITIES FUTURES RETURN VERSUS CHANGES IN IMPLIED EQUITY VOLATILITY AND THE DOLLAR CONTROLLING FOR RECESSION Series Name Gold Silver Oil 0 (x100) r r VIX VIX RECESSION DOLLAR 13 DOLLAR RECESSION ~ Suden 0, I ** 0.047** (0.016) 0.051* (0.05) *** (0.01) *** (0.013) (0.014) (x100) 0.037*** (0.014) ** (0.03) 4 (x100) 0.03 (0.0) (0.031) -0.16* (0.057) *** (0.07) *** (0.047) *** (0.066) *** (0.084) ** (0.144) *** (0.0) 0 (x10 5 ) 0.03*** 0.096*** (0.07) 0.433*** (0.106) *** 0.015*** 0.04*** (0.007) 0.940*** 0.948*** 0.930*** *** 0.03*** (0.005) *** (0.009) 4.005*** (0.31) 4.15*** (0.54) 6.389*** (0.618) NOTE: r is he daily coninuously compounded daily reurn for he fuures series, VIX denoes he day-o-day change in he CBOE VIX index. DOLLAR denoes he coninuously compounded reurn on he rade weighed dollar index agains oher major currencies. RECESSION denoes a recessionary period in he economy, as defined by he NBER Business Cycle Daing Commiee. Sandard errors are in parenhesis and *, **, and *** denoe saisical significance a he 10%, 5% and 1% percen levels, respecively. Journal of Accouning and Finance vol. 13(1)

13 Relaion of Commodiies wih Realized Volailiy Table 6 presens esimaion resuls for our model ha incorporaes he dollar index and realized S&P 500 volailiy. We find no saisically significan relaionship beween gold, silver, or oil reurns and conemporaneous equiy volailiy. 16 The resuls for conemporaneous volailiy in Table 6 sharply conras wih he relaion beween implied volailiy and he commodiies ha we showed in Tables 3, 4, and 5. The esimaed 3 coefficiens are negaive for all hree series, bu we canno rejec he hypohesis ha he esimaed 3 coefficien is zero for gold series, and we are only able o rejec i a he 10% level for our silver and oil series. In oher words, here appears o be (a bes) a modes saisical relaionship beween conemporaneous volailiy and hese hree commodiy reurns. This resul suggess ha invesors in commodiies anicipae changes in equiy markes (which is consisen wih Baen, Ciner & Lucey (010)) raher han reac o hem. TABLE 6 PARAMETER ESTIMATES FOR CHANGES IN COMMODITIES FUTURES RETURN VERSUS CHANGES IN CONTEMPORANEOUS EQUITY VOLATILITY AND THE DOLLAR r r DOLLAR SPVOL ~ Suden 0, , I 1 Name Gold Silver Oil (x100) 0.04** 0.071*** 0.086** 0 (0.010) (0.01) (0.03) *** *** (0.01) (0.013) (0.014) *** *** *** 1 (0.06) (0.045) (0.063) * * 3 (0.90) (1.465) (.500) (x10 5 ) 0.05*** 0.096*** 0.404*** 0 (0.007) (0.07) (0.104) 0.016*** 0.015*** 0.041*** 1 (0.007) 0.940*** 0.949*** 0.93*** 0.09*** 0.03*** (0.005) 4.041*** 4.33*** 6.630*** (0.49) (0.53) (0.637) NOTE: r is he daily coninuously compounded reurn for he fuures series, SPVOL, 0.5denoes conemporaneous volailiy measured by he summaion of coninuously compounded log 30-minue S&P 500 reurns across an individual day, filered wih a EWMA mehod using a smoohing parameer of 0.5, and DOLLAR denoes he coninuously compounded reurn on he rade weighed dollar index agains oher major currencies.. Sandard errors are in parenhesis and *, **, and *** denoe saisical significance a he 10%, 5% and 1% percen levels, respecively. As in all of he previous resuls, GARCH effecs are presen, posiive, and saisically significan a he 1% level for all hree commodiies. The lepokuric disribuion is suppored in he economeric specificaion, as he esimaed degrees of freedom of he -disribuion are saisically significan a he 1% level for all of he commodiies. 8 Journal of Accouning and Finance vol. 13(1) 013

14 Relaion of Commodiies wih Implied and Realized Volailiy In Table 7, we examine he effecs of anicipaed and conemporaneous volailiy on our commodiies reurns. The resuls are largely he same as for he individual resuls in Tables 4 and 6. In he presence of realized changes in S&P 500 reurns, he precious meals have a posiive and significan relaion o changes in VIX (gold a he 1% significance level; silver a 5%); oil has a negaive and significan relaion o changes in VIX a he 5% level. The economic significance is he same as described for Table 4 above. TABLE 7 PARAMETER ESTIMATES FOR CHANGES IN COMMODITIES FUTURES RETURN VERSUS CHANGES IN IMPLIED AND CONTEMPORANEOUS EQUITY VOLATILITY AND THE DOLLAR r r DOLLAR VIX SPVOL ~ Suden 0, , 0.5 I Name Gold Silver Oil ( 100) 0.04** 0.071*** 0.088** 0 (0.010) (0.01) (0.031) *** *** (0.01) (0.013) (0.014) *** *** *** 1 (0.06) (0.045) (0.064) ( 100) 0.04*** *** (0.007) (0.01) (0.0) * * 3 (0.867) (1.481) (.401) (x10 5 ) 0.04*** 0.000*** 0.000*** 0 (0.000) (0.000) 0.017*** 0.015*** 0.040*** *** 0.949*** 0.933*** 0.08*** 0.03*** (0.005) (0.009) 4.009*** 4.7*** 6.504*** (0.38) (0.71) (0.700) NOTE: r is he daily coninuously compounded reurn for he fuures series, VIX denoes he day-o-day change in he CBOE VIX index. SPVOL, 0.5denoes conemporaneous volailiy measured by he summaion of coninuously compounded log 30-minue S&P 500 reurns across an individual day, filered wih an EWMA mehod using a smoohing parameer of 0.5,, and DOLLAR denoes he coninuously compounded reurn on he rade weighed dollar index agains oher major currencies. Sandard errors are in parenhesis and *, **, and *** denoe saisical significance a he 10%, 5% and 1% percen levels, respecively. In he presence of implied volailiy, he relaion beween conemporaneous volailiy and precious meals is no significanly differen from zero. Alhough he coefficien for gold does change sign and is now posiive, no negaive as in Table 5 is sill saisically zero. The GARCH parameers are almos idenical o hose presened in previous ables, including he volailiy asymmery erm. Incorporaing realized volailiy ino he model also did no change he relaion for VIX o he commodiies when he recession dummy was included. As in Table 5, Table 8 shows approximaely he Journal of Accouning and Finance vol. 13(1)

15 same poin esimaes a he same levels of significance for gold, silver, and oil. The relaion beween he recession erm and oil remains negaive, suggesing a negaive impac of anicipaed inflaion on oil prices during recessions. Persisence is unchanged in he presence of boh realized volailiy and he ineracion erm. TABLE 8 PARAMETER ESTIMATES FOR CHANGES IN COMMODITIES FUTURES RETURN VERSUS CHANGES IN IMPLIED AND CONTEMPORANEOUS EQUITY VOLATILITY AND THE DOLLAR CONTROLLING FOR RECESSION r 0 1r 11DOLLAR 13DOLLAR RECESSION VIX 3VIX RECESSION 3 SPVOL, SPVOL, 0.5 RECESSION Name Gold Silver Oil (x100) 0.06** 0.074*** 0.076** 0 (0.011) (0.01) (0.03) *** *** (0.01) (0.013) (0.016) -0.56*** *** *** 1 (0.07) (0.047) (0.066) *** ** *** 13 (0.084) (0.144) (0.03) ( 100) 0.037*** ** (0.013) (0.03) ( 100) ** 3 (0.0) (0.031) (0.054) * (1.066) (1.699) (3.37) (1.61) (.67) (4.071) (x10 5 ) 0.03*** 0.097*** 0.435*** 0 (0.07) (0.108) 0.016*** 0.015*** 0.040*** 1 (0.011) 0.940*** 0.948*** 0.930*** 0.08*** 0.03*** (0.005) (0.014) 4.008*** 4.31*** 6.388*** (0.47) (0.66) (1.054) NOTE: r is he daily coninuously compounded reurn for he fuures series, VIX denoes he day-o-day change in he CBOE VIX index. SPVOL, 0.5denoes conemporaneous volailiy measured by he summaion of coninuously compounded log 30-minue S&P 500 reurns across an individual day, filered wih an EWMA mehod using a smoohing parameer of 0.5, DOLLAR denoes he coninuously compounded reurn on he rade weighed dollar index agains oher major currencies. RECESSION denoes an NBER daed recessionary cycle. Sandard errors are in parenhesis and *, **, and *** denoe saisical significance a he 10%, 5% and 1% percen levels. 84 Journal of Accouning and Finance vol. 13(1) 013

16 For conemporaneous volailiy, he inclusion of VIX and he ineracion dummies resuls in differences when compared wih he resuls in Table 6. The relaion beween oil and realized volailiy, which was previously negaive and significan a he 10% level, is now no saisically significan. The conemporaneous volailiy ineracion wih recession was no saisically significan for any of he commodiies. CONCLUSIONS This paper examines he effec ha implied and conemporaneous volailiy has on he reurns series of gold, silver, and oil fuures over he 1990 o 010 ime span. We find srong evidence ha he reurns of all hree commodiies fuures are influenced by implied volailiy. Gold and silver have a posiive relaionship wih implied volailiy, supporing he idea ha invesors perceive precious meals as safe havens, o be purchased in anicipaion of rising equiy marke volailiy. Oil has a negaive relaionship wih implied volailiy, indicaing a reacion o an anicipaed decrease in demand. Our findings are robus o he inclusion of a dollar index o proxy for various macroeconomic condiions. By conras, conemporaneous volailiy has lile or no influence on he reurns of any of our commodiy fuures series. This suggess ha invesors efficienly anicipae changes in he financial markes, and herefore do no have o cach-up in heir use of commodiies as an equiy hedge. As commodiies have expanded heir role as porfolio diversificaion ools, heir relaion o volailiy in he financial markes has aken on a new relevance. This paper shows ha invesors have incorporaed informaion abou equiy marke changes ino heir valuaion of precious meals and oil. ENDNOTES 1. Invesmen Company Insiue 011 Facbook. hp:// The CBOE Volailiy Index VIX, CBOE, hp:// 4. Lorean, Mico, Indexes of he Foreign Exchange Value of he Dollar, Federal Reserve Bullein, Winer 005, p For addiional deails regarding he consrucion of he dollar index series, please see: hp://research.slouisfed.org/fred/series/dtwexm?cid=94 5. For example, he highes level of he VIX, 80.86, occurred a he heigh of he "Grea Recession" in November of 008. This was an increase of approximaely 800% from he boom over he preceding period. 6. Noe ha we are subsuming a commodiy specific index here, and elsewhere in he paper, for noaional simpliciy. 7. Following convenion, we esimae he inverse of he degrees of freedom, 1, in he forhcoming analysis. 8. In an (unrepored) model selecion and evaluaion exercise, we experimened wih various low-order AR models for he mean and evaluaed he GARCH- model (Bollerslev (1987)), he EGARCH model (Nelson (1991)), he Quadraic GARCH model (Senana (1995)), and he hreshold GARCH~ model (Zakoian (1994)) relaive o he GJR model. Sandard informaion crieria seleced he AR1-GJR-GARCH(1,1)~ model employed herein as he bes model for our purposes. We also use Ljung & Box (1978) Pormaneau 1 ess saisics o es for eigheenh order serial correlaion in he sandardized ( z ) and squared, sandardized ( z ) residuals from equaion (1) hrough (3), above. These ess reveal ha our model does, in fac, eliminae any serial correlaion and volailiy clusering in our daa. These resuls are available upon reques. 9. The acual marix of dummy variables include he number of non-rading days beween observaion and - 1; a day of he week dummy (excluding Wednesday); a monh of he year variable (excluding June); a ime rend; and a ime rend squared variable. 10. We also esimae a varian of he model deailed in Equaion (7) ha incorporaes he aforemenioned RECESSION dummy variable. The coefficien on his dummy variable is no saisically differen from zero, so we omi a discussion of he model in he ineres of breviy. Resuls available upon reques. Journal of Accouning and Finance vol. 13(1)

17 11. See, for example, Andersen, Bollerslev & Diebold (009), Frijns & Margariis (008), and Fleming, Kirby & Osdiek (003), among many ohers, for discussions abou he advanages of realized inraday volailiy over radiional daily volailiy measures. 1. In unrepored sensiiviy analysis, we experimened wih a range of values for, including = 0.1, 0.3, 0.5, 0.7 and 0.9. None of he resuls were subsanially changed by he choice of he smoohing parameer. Resuls are available upon reques %. 14. The resuls excluding he dollar index conrol variable were subsanially he same for he poin esimaes in Table 5, excep ha he mean reversion for oil was significan a 10%, while silver was significan a 5%. For he ineracion erms, he only maerial differences were ha for gold, he ineracion erm was significan a 10%; while for oil, i was no significanly differen from zero. All he GARCH effecs were approximaely he same wih and wihou he dollar index. A able is available upon reques. 15. The coefficien on he change in VIX is shown muliplied by We also esimae versions of he model similar o he model presened in Table 3 (using only conemporaneous S&P 500 volailiy) and Table 5 (incorporaing conemporaneous S&P 500 volailiy and a recession erm.) The resuls do no differ from he resuls presened in Table 6. Conemporaneous volailiy was no saisically significan wih or wihou he recession erm, so we do no discuss hese resuls (which are available upon reques) here. REFERENCES Andersen, T.G., Bollerslev, T., Diebold, F.X., 009. Parameric and Nonparameric Volailiy Measuremen. In: Aï-Sahalia Y & Hansen LP (eds.) Handbook of Financial Economerics. Elsevier Science B.V., Amserdam, pp Andersen, T.G., Bollerslev, T., Diebold, F.X., Labys, P. (001). The Disribuion of Realized Exchange Rae Volailiy. Journal of he American Saisical Associaion, 96, (453), Andersen, T.G., Bollerslev, T., Diebold, F.X., Labys, P. (003). Modeling and Forecasing Realized Volailiy. Economerica, 71, (), Andersen, T.G., Bollerslev, T., Meddahi, N. (004). Analyical Evaluaion of Volailiy Forecass. Inernaional Economic Review, 45, (4), Baen, J.A., Ciner, C., Lucey, B.M. (010). The Macroeconomic Deerminans of Volailiy in Precious Meals Markes. Resources Policy, 35, (), Baur, D.G., Lucey, B.M. (010). Is Gold a Hedge or a Safe Haven? An Analysis of Socks, Bonds and Gold. Financial Review, 45, (), Baur, D.G., McDermo, T.K. (010). Is Gold a Safe Haven? Inernaional Evidence. Journal of Banking and Finance, 34, (8), Becker, R., Clemens, A.E., Whie, S.I. (007). Does implied volailiy provide any informaion beyond ha capured in model-based volailiy forecass? Journal of Banking & Finance, 31, (8), Bollerslev, T. (1987). A Condiionally Heeroskedasic Time Series Model for Speculaive Prices and Raes of Reurn. Review of Economics and Saisics, 69, (3), Bollerslev, T., Wooldridge, J.M. (199). Quasi-maximum Likelihood Esimaion and Inference in Dynamic Models wih Time-Varying Covariances. Economeric Reviews, 11, (), Journal of Accouning and Finance vol. 13(1) 013

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