Time‐varying pure contagion effect between energy and nonenergy commodity markets

Abstract

This paper combines the Kalman filtering technique and the time‐varying parameter vector autoregression model with stochastic volatility model to explore pure contagion effects between energy and nonenergy (i.e., industrial metals, precious metals, and agricultural) commodity markets. Empirical results show the significant pure contagion effects between energy and industrial metals markets in most periods, while pure contagion effects between energy and precious metals and agricultural markets occur only in a few specific periods. Comparing the level of pure contagion effects between different commodity markets, energy is still the main price transmitter. In addition, with the acceleration of the global commodity market financialization process, the frequency and harm of pure contagion effects are gradually increasing. Notably, the COVID‐19 pandemic is emerging as another major crisis after the global financial crisis, exacerbating the pure contagion effects between energy and precious metals and agricultural markets.

Time-frequency volatility transmission among energy commodities and financial markets during the COVID-19 pandemic: A Novel TVP-VAR frequency connectedness approach

“…It is widely acknowledged that the global market integration and financialization not only result in increased liquidity and ease of trading in energy commodity markets, but also tend to foster speculation and thus increasing market volatilities, which may serve as the channel for the time-varying and asymmetric volatility spillovers across energy commodities and non-commodity markets ( Balli et al, 2019 ; Gong et al, 2021 ; Ma et al, 2021 ; Farid et al, 2022 ; Gong and Xu, 2022 ), as well as other financial markets ( Naeem et al, 2020 ; Mensi et al, 2022 ). For example, Gong et al (2022) document that the global commodity financialization significantly contributes to stronger pure contagion effects among energy and non-energy commodity markets, highlighting the central role of energy market in volatility transmission, while Gong and Xu (2022) further investigate the asymmetric effect of Geopolitical risk on the volatility spillover between energy commodities and other financial markets. Mensi et al (2022) provide further evidence on the asymmetric spillover between gold, oil and EU subsector markets under extreme events such as the 2008 GFC and Covid-19, while Wang (2022) addresses the issue from the perspective of market efficiency and spots stronger spillover from more efficient markets (industrial metal and energy) to less efficient ones (EU stock markets).…”

“… 2 Researchers also propose and utilize different approaches to address this issue and suggest that the global pandemic significantly contributes to the increasing the cross-market volatility transmission. For example, Gong et al (2022) integrate the Kalman Filter technique with the TVP-VAR-SV model and spot that the COVID‐19 pandemics significantly intensifies the pure contagion effects between energy and non-energy commodity markets. Wang (2022) utilizes the combination of fuzzy entropy and multivariate transfer entropy analysis and finds that the COVID-19 turbulence is accompanied with stronger connectedness and higher information spillover among commodities and financial markets.…”

COVID‐19 and tail risk contagion across commodity futures markets

“…On the one hand, as commodities are increasingly becoming an essential component of investment portfolios, investors urgently need to identify price linkages among commodities to optimize asset allocation and diversify portfolio risk (Tiwari et al, 2020 ; Xiao et al, 2020 ; Zhang & Broadstock, 2020 ). On the other hand, close price linkages make it easier for shocks to spread from one market to another, especially in times of crisis, so the investigation of them is important for understanding risk contagion mechanisms and preventing systemic financial risks (Gong et al, 2022 ; Liu et al, 2022 ; Zhu et al, 2021 ).…”

“…The investigation of linkages and spillovers between different commodity markets stems from commodity financialization (Ding et al, 2021 ; Gong et al, 2022 ). 1 Due to the low correlation between the prices of commodities and traditional financial assets, many investors incorporate commodity futures, especially metals and agricultural commodities, into their portfolios as a tool for hedging and diversification.…”

“…To shed light on the aforementioned question and extend the research on cross‐market associations, this paper examines tail risk contagion across commodity markets during the COVID‐19 crisis. Although a number of studies have examined the impact of COVID‐19 on price linkages between commodity markets (e.g., Chen et al, 2022 ; Gong et al, 2022 ; Hung, 2021 ; Just & Echaust, 2022 ; Sun et al, 2021 ; Umar et al, 2022 ; Zhang & Ding, & Shi, 2022 ), most of them, however, have only focused on linkages between a few typical commodities (e.g., the linkages between crude oil and agricultural commodities) or various commodity indices, looking only at the connectedness of returns and volatility among commodities. To the best of our knowledge, little attention has been paid to the impact of COVID‐19 on the tail risk connectedness across commodities, and our study fills this gap.…”