How COVID-19 drives connectedness among commodity and financial markets: Evidence from TVP-VAR and causality-in-quantiles techniques

Abstract

With many commodity and financial markets reportedly experiencing poor performances during this COVID-19 pandemic, this study intends to examine the effect of the pandemic on the connectedness among the markets. There are several reasons that suggest that apart from the pandemic affecting the performances of the markets, it can also be a driver of their connectedness, coming from the perspective of the global financial cycle channel. Therefore, we first employ the recently developed time-varying parameter vector autoregressions (TVP-VAR) technique to examine the volatility spillover among the commodity and financial assets. We find evidence of strong volatility across the markets, with gold and USD being net receivers of shocks, and others, net transmitters. With this evidence, we proceed to the evaluation of the influence of the COVID-19 pandemic on the connectedness across the markets using both the linear and non-linear (causality-in-quantiles) causality tests. The causality-in-quantiles test outperforms the linear Granger-causality test, and the results show significant causal impacts of the two measures of COVID-19 pandemic (infectious diseases-based equity market volatility and the growth rate of the U.S. COVID-19 reported cases) on the connectedness across the markets, especially at the lower and middle-level quantiles. Overall, these findings prove that the pandemic has been largely responsible for risks transmission across various commodity and financial markets. This is because it has significantly raised investors’ and policy uncertainties and immensely altered global financial cycle which in turn results in global flows of capital, and movements in the prices of assets across different financial markets.

Uncertainty Due to Pandemic and the Volatility Connectedness Among Asian REITs Market

“…As documented in Table 1 (Panel B), EMVID causes all the connectedness measures except the net directional connectedness of China and Hong Kong. Nevertheless, we cannot rely on the result of the linear causality test due to the possibility of poor performance in the presence of undesirable statistical properties and nonlinearities (see, Adekoya & Oliyide, 2020;Balcilar et al, 2016;Fasanya et al, 2021). With this in mind, we proceed to performing the Brook et al (BDS test, 1996), which can unveil the presence of nonlin-Uncertainty Due to Pandemic and the Volatility Connectedness Among Asian REITs Market earities among the series.…”

“…In this vein, we motivate our study in three ways. First, the COVID-19 pandemic, which has its origin from the Asian-Pacific region (Akinsomi, 2020), has been noted as having a significant influence on the global REITs market (Akinsomi, 2020), and other financial markets, causing them to be volatile and subtle to shocks (Adekoya & Oliyide, 2020;Iyke, 2020aIyke, , 2020b. Second, Liow & Huang (2018) document that the volatility transmission between international REITs' is sensitive to crises.…”

“…Second, Liow & Huang (2018) document that the volatility transmission between international REITs' is sensitive to crises. With this, a market can transmit shocks or volatility to another market due to the increasing integration of these markets (Adekoya & Oliyide, 2020). Third, just like other forms of uncertainty, the uncertainty due to pandemic raises fear and sentiments among investors and other economic agents (Fasanya et al, 2021;Iyke & Ho, 2021), thus, accounting for the risk-receiving and -giving characteristics of markets will provide insights into hedging possibilities and portfolio diversification.…”

Volatility spillovers and contagion between energy sector and financial assets during COVID-19 crisis period

“…In the same line of research, Mazur et al ( 2020 ) found that natural gas, healthcare, software, and food stocks earn high positive returns, whereas, petroleum, entertainment, real estate, and hospitality sectors stocks fall dramatically during the COVID-19 pandemic. Adekoya and Oliyide ( 2021 ) and Gorbel and Jeribi ( 2021b ) show that the latter cited pandemic is responsible for risk transmission across commodity and financial markets. Contrary to gold, Ghorbel and Jeribi ( 2021b ) found that Bitcoin cannot be considered as a safe haven during the global pandemic when investing in crude oil.…”

The Impact of the SARS-CoV-19 Pandemic on the Global Gross Domestic Product

“…As research in the healthcare perspective is starting to yield significant effects, it is now time to focus our attention on the economy and the significant consequences the pandemic has had in this context. A number of scholars have already studied the impact of the global health crisis on financial markets whose sharp fluctuations during the pandemic have led to confusion and uncertainty among investors [ 14 , 15 , 16 ]. Results reported by other researchers indicate that the SARS-CoV-19 pandemic has changed consumer behaviors [ 17 ].…”