Abstract
The paper aims to examine the spillover of uncertainty among commodity markets using Diebold–Yilmaz approach based on forecast error variance decomposition. Next, causal impact of global factors as drivers of uncertainty transmission between oil and other commodity markets is analyzed. Our analysis suggests that oil is a net transmitter to other commodity uncertainties, and this transmission significantly increased during the global financial crisis of 2008–2009. The use of linear and nonlinear causality tests indicates that the global factors have a causal effect on the overall connectedness, and especially on the spillovers from oil to other commodity uncertainties. Further segregation of transmissions between oil to individual commodity markets indicates that stock market implied volatility, risk spread, and economic policy uncertainty are the influential drivers of connectedness among commodity markets.
Highlights
Amidst the financialization of commodities, understanding the dynamics of commodity markets, such as energy, precious metals, industrial metals, and agriculture, has become an important topic for investors, policymakers, and risk managers
We follow the connectedness framework of Diebold and Yilmaz [36] to estimate the different transmission measures built from the forecast-error variance decomposition (FEVD) matrix centered on the generalized vector-autoregressive (VAR) model
We generally find a significant impact of global factors, the results indicate a stronger impact of volatility index (VIX), TED spread, and U.S Dollar (USD) index on the transmissions running from oil to other commodity uncertainties
Summary
Amidst the financialization of commodities, understanding the dynamics of commodity markets, such as energy, precious metals, industrial metals, and agriculture, has become an important topic for investors, policymakers, and risk managers. This financialization, along with increased integration of global markets, has augmented the transmission between different markets [1,2,3]. Oil is considered as an important commodity [5]. Hooker [10] proposed that due to expansion in economic activities, there is seen an increase in global demand for oil, which enhances the oil prices that result in more usage of precious and industrial metals, say tin and copper
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