Effects of Interdependence and Contagion on Crude Oil and Precious Metals According to ρDCCA: A COVID-19 Case Study

Abstract

The energy sector has been the main economic hub in everyone’s lives and in world geopolitics. Consequently, oil, gas, electricity and energy from renewable sources (wind and solar) are traded on the stock market, and all interconnected around the world. On the other hand, a global health crisis, such as COVID-19, can produce a great economic catastrophe. In this scenario, a robust statistical analysis will be performed here with respect to the concept of interdependence and contagion effect. For this project, we chose to study the relationship between the main source of energy (crude oil, WTI and Brent) and two (Gold and Silver) precious metals (which are a safe haven for investment). Therefore, with the novelty of the application of ρDCCA and ΔρDCCA coefficients before and during the COVID-19 crisis (announced by the World Health Organization), the interdependence and the contagion effect were calculated. We verified that COVID-19 had no influence on contagion effect between crude oil in its indexes, WTI and Brent, since they have already shown to be highly interdependent, both before and after the World Health Organization COVID-19 decree. Likewise, COVID-19 had a significant influence on the crude oil and precious metal sectors, which was evident as we identified an increase in its interdependence, with a clearly positive contagion. These results show that COVID-19 imposed a restructuring in the relationship between energy (crude oil) and precious metals. More details will be presented throughout this article.

Extreme Events Cause Market Efficiency or Inefficiency? Evidence from Precious Metals and Green Stock Indices

“…The main advantage of applying DFA is the ability to remove trends from the series, which skew the true correlation of the fluctuations of the random variables involved, and thus enable long-range correlations to be seen in signals with polynomial trends, which can mask the true correlations (Santana et al, 2023).…”

“…Growing global attention to reducing carbon emissions and transitioning to clean energy sources has resulted in significant investments in renewable technologies such as solar, wind, hydroelectric and geothermal energy. As a result, the clean energy sector has become a crucial component driving economic growth Santana et al, 2023).…”

Interdependence and contagion effects in agricultural commodities markets: A bibliometric analysis, implications, and insights for sustainable development

“…Technological development, the internet, and social media have accelerated the process of globalization and worldwide connectivity, enabling the real-time transmission of information. In turn, globalization has broken down international investment barriers, leading to increased interdependence (integration/correlation) among different countries and regions (Santana et al, 2023), making socio-economic systems increasingly chaotic and susceptible to the transmission of crises, among other factors (Grass et al, 2019). Understanding these relationships and monitoring their dynamics enables diversifying investment, structuring, and planning (Dias et al, 2021).…”

“…The interdependence between markets or the indexes representing them is understood as a relationship, analysis of correlation, integration, or coupling between them (Bertero & Mayer, 1990;Guedes et al, 2019;Pietrzak et al, 2017;Reboredo et al, 2014;Santana et al, 2023;Silva et al, 2015), where a change in behavior or interference in one system can disturb the dynamics of another system. Because of this, the contagion effect is understood as the effects' transmission of a financial or economic disruption (crash or volatility) from one sector, region, or market to another (Bashir et al, 2019;Forbes & Rigobon, 2001;Santana et al, 2023;Silva et al, 2016). The interdependence among markets is a well-acknowledged characteristic during stable times.…”

“…Both globally and locally, society has constantly gone through various crises caused by the most diverse natures: energy and oil, 1980; Brazilian energy, 2001; the USA housing market, 2008; and recently we have the world economic recession, 2018; COVID-19, 2020; war between Russia and Ukraine, 2022 and war between Hamas and Israel, 2023 (Fiszeder & Małecka, 2022;Kramarova et al, 2022;Liu et al, 2021;Svabova et al, 2021). These instabilities generate numerous social and environmental problems, such as inflation, hunger, unemployment, food insecurity, shortages, deforestation, inadequate land exploitation, and desertification (irrational use of natural resources), problems that we can associate with the pillars of sustainability and their interconnections (Despard et al, 2020;Parra Paitan & Verburg, 2019;Santana et al, 2023). Faced with the impact that the dy-namics of interdependence or contagion have on understanding financial and economic markets and delineating investment strategies, investigations that contribute to and extend research related to this theme are considered of great relevance.…”