The Volatility Behavior and Dependence Structure of Commodity Futures and Stocks

This study finds substantial risk diversification potential between certain com-
modity groups and stocks by exploring the dependence between their patterns
of regime switching. None of the commodity groups share a common volatility
regime with stocks, nor are the regime-switching patterns of grains, industrials,
metals, or softs, dependent on that of stocks. Simultaneous volatile regimes of
commodity futures and stocks tend to be infrequent and short-lived. In addition,
in spite of financial contagion, animal products, grains, and softs typically demon-
strate very low correlations with stocks even in simultaneous volatile regimes.