Connectedness Between US Futures Markets and the Macroeconomy. A Time-Varying Approach

Abstract

This study contributes new empirical evidence on the dynamic connectedness among US futures markets and the macroeconomy from 1997 to 2017 and covers two periods of increased uncertainty such as the tech bubble and the global financial crisis. A time-varying parameter VAR model (TVP-VAR) is used in conjunction with the recently developed connectedness approach by Diebold and Yilmaz (2014), Korobilis and Yilmaz (2018) and Koop and Korobilis (2013). Findings suggest a strong link between futures markets and the macroeconomy, particularly during crisis periods. Total connectedness ranged between 60% and 78% before the crisis, surged to 90% with the onset of the crisis and remained high at nearly 80% until the sample concluded. Results show different responses to the global financial crisis in terms of spillovers. Monetary policy variables significantly influenced other markets and macroeconomic variables primarily up to the onset of the crisis, while futures markets and most macroeconomic factors contributed to others predominantly after the crisis. Importantly, futures market volatilities show a higher contribution to (from) the macroeconomy as a group compared to futures market returns. Thus, futures market volatilities not only explain better macroeconomic forecast error variance but capture better market expectations about future changes in the macroeconomy.