This paper examines the inclusion of the dollar/euro exchange rate together with
important commodities in two different BEKK, or multivariate conditional covariance,
models. Such inclusion increases the significant direct and indirect past shock and
volatility effects on future volatility between the commodities, as compared with their
effects in the all-commodity basic model (Model 1), which includes the highly-traded
aluminum, copper, gold and oil. Model 2, which includes copper, gold, oil and exchange
rate, displays more direct and indirect transmission than does Model 3, which replaces
the business cycle-sensitive copper with the highly energy-intensive aluminum. Optimal
portfolios should have more Euro than commodities, and more copper and gold than oil.
The multivariate conditional volatility models reveal greater volatility spillovers than
their univariate counterparts.
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