Pandemic's Ripple Effect: Exploring Dynamic Connectedness of Indian Equity and Commodity Markets

Abstract

This research investigates volatility spillovers between the Indian equity markets and commodity futures markets. The Nifty 50 index is chosen as a representative of the equity market, based on market capitalization, while Crude Oil, Copper, Zinc, Gold, and Silver are selected to represent the commodity market in India. The selection of each commodity is grounded in considerations of liquidity and physical market size. This research investigates how the volatility in the Indian stock market interacted with the volatility of five major commodity markets throughout the COVID-19 pandemic. In order to ascertain the direction of information flow, the study employs the Granger causality approach. The research investigates how volatility transmits from the Indian equity market to various commodity markets. Employing methodologies inspired by Diebold and Yilmaz (2012) for Time Varying Parameter and Vector Autoregression (TVP VAR) analysis, the study explores these connections. To further delve into the dynamic relationship between these markets, wavelet coherence analysis is also utilized. This methodologically robust approach goes beyond traditional correlation analysis by deconstructing the co-movements across different time scales, offering a more nuanced understanding of the complex relationships and potential transmission mechanisms at play during the unprecedented period of the COVID-19 pandemic. By analyzing the frequency-dependent interactions between these markets, the study aims to shed light on how economic shocks and market fluctuations in one sector might propagate and impact the other, providing valuable insights for investors, policymakers, and researchers alike.