Modeling Covid-19 contagious effect between asset markets and commodity futures in India

Abstract

For the purpose of optimizing an investment portfolio in the Indian market, this research provides an understanding of the connectedness, volatility transmission and investment scenario between different pairs of commodity futures and assets, observing the impact of Covid-19. To do that, we derived a daily dataset spanning from 2016 to 2021 bifurcated into two panels comprising the pre & post-Covid-19 onset periods. First, we employed wavelet coherence plots to check the directional connectedness between asset and commodity futures. The DCC-GARCH model was then applied on both the data panels to investigate and compare volatility transmission. Hedge ratios and optimum portfolio weights have been estimated to demonstrate a comparative investment scenario. We observe a significant long-term volatility transmission from the asset markets to commodity futures for both the onset panel. Commodity futures provide effective hedging and diversification efficiency against the asset markets. DCC, hedge ratio and optimum portfolio weights show the heterogeneous patterns of investment for pre & post-Covid-19 period. Gold, bond, bullion futures and exchange rates are recognized as a gauge of the economy in crisis. This work will provide significant insight to readers about portfolio construction and required changes in portfolio weights in normal and crisis market conditions.