Abstract
AbstractIn this paper, we provide a comprehensive study of the linkages between global commodity price shocks and national financial markets. We consider an overall price index, three proxies of global oil shocks (overall, supply and demand) and non‐oil (metal) price shocks and assess their causal relationships with the stock prices of a large set of heterogeneous countries in terms of development. Using a mixed‐frequency VAR approach in a time‐varying setting, we construct a Global Commodity Connectivity Index and a Global Stock Connectivity Index to monitor the prevalence, over time, of Granger‐Causality from commodities to stock markets and vice versa. Our results show the existence of time‐varying causality during the observed period depending on the level of country development and the position on the global commodity shocks super‐cycles: the commodities depression of the 1980s and 1990s, the commodity boom of the 2000s and the post‐Global Financial Crisis.
Highlights
Large swings in commodity prices are a historical reality
In order to assess the overall level of connectivity between global commodity prices and national stock markets, we use two Global Connectivity Indices, defined as the ratio between the number of identified Granger causal links and the total possible links for each rolling window
We investigate the global causal links between commodity prices and stock market returns in a time-varying setting
Summary
Large swings in commodity prices are a historical reality. It is not surprising, that several studies have investigated the impact of commodity prices on national macroeconomic conditions.1In this paper, we concentrate in particular on the relationship between commodities and financial markets. Large swings in commodity prices are a historical reality. It is not surprising, that several studies have investigated the impact of commodity prices on national macroeconomic conditions.. We concentrate in particular on the relationship between commodities and financial markets. Such a relationship is important for a number of reasons. From an economic development perspective, overexposure to commodities can reduce the ‘depth’ and ‘width’ of national stock markets, as the excessive volatility of world commodity prices translates into riskier and more expensive equity financing for local firms (see, Aghion, Angeletos, Banerjee, & Manova, 2010).. Nissanke (2012) notes that swings and volatility in
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