On the financial connectedness of the commodity market: a replication of the Diebold and Yilmaz (2012) study

In this paper we replicate the Diebold and Yilmaz (2012) study on the connectedness of the Commodity market and three other financial markets: the stock market, the bond market, and the FX market. We show that both the row and the column normalization schemes of the Generalized Forecast Error Variance Decomposition, suggested by the authors, lead to inaccurate measures of net contribution to risk transmission, in terms of ranking and sign. We show that, considering data generating processes characterized by different degrees of comovement and persistence, a scalar based normalization of the Generalized Forecast Error Variance Decomposition yields consistent (free of sign and ranking errors) net spillovers.