Financial Market Stress and Commodity Returns: A Dynamic Approach

Abstract

This paper examines the relationship between commodity index returns and the Office of Financial Research Financial Stress Index (OFR FSI). Utilizing the S&P GSCI and its five sub-indices (agriculture, livestock, energy, industrial metals, and precious metals), we find that the causal relationship between financial market stress and commodity index returns is conditional on the sample period examined and the methodology employed. We also note that stress in financial markets has a negative relationship with commodity index returns during low commodity return states; however, during high commodity return states, financial market stress exhibits a positive relationship with commodity index returns. Our findings highlight the importance of considering a time-varying framework for analyzing commodity return dynamics.