Bidirectional spillover effect between Russian stock index and the selected commodities

Abstract

This paper investigates shock and volatility spillover effect between Russian index RTS and six futures commodities (Brent oil, natural gas, gasoline, gold, platinum and palladium), observing joint time-frequency domain via wavelet decomposed series. Due to the fact that our time-span of almost 16 years is permeated with tranquil and crisis periods, we divided full-sample into three subsamples – before, during and after World financial crisis (WFC) via modified ICSS algorithm. We find that spillover effects happen mostly from the commodity markets toward RTS index in all three subsamples. However, during relatively calm periods (first and third sub-periods), spillover effects are very moderate and they occur in relatively few wavelet scales, which points that duration of these effects is limited in peaceful times. On the other hand, duration of spillover effects and its intensity increased during WFC. Also, wavelet coherence indicates that there are areas of stronger co-movements in period of WFC at higher wavelet scales for pairs such as RTS-Brent, -gasoline and -platinum. Commodities that have the strongest transmission effect on RTS index are Brent oil, gasoline and palladium, while gold has strong volatility transmission only during WFC.

Keywords

• commodities
• spillover effect
• MODWT
• BEKK-GARCH
• wavelet coherence