Volatility connectedness among the Indian equity and major commodity markets under the COVID-19 scenario

Abstract

In this paper, the dynamic relationship between the volatilities of both the Indian equity market and six major commodity markets is analyzed during the COVID-19 pandemic. We employ the time-varying parameters vector autoregression model and wavelet coherence approach to assessing market connectedness. The results reveal a significant increase in volatility correlation and spillovers between the Indian equity market and the six major commodity markets after the outbreak of COVID-19. Furthermore, it was found that after the COVID-19 outbreak, the volatility from the commodity markets rapidly spilled over to the Indian equity market. Similar evidence is also suggested by the wavelet coherence and confirms that the high level of contagion mainly occurs in the medium and long term. We further incorporate our evidence with hedging ratio and minimum portfolio connectedness weight. The results uncover that copper and crude oil are useful assets for Indian equity investors to conduct hedging and construct the portfolio.