Dynamic Volatility Spill-over between Commodity and Stock Markets: Evidence from an Emerging Market Economy

• DOI: 10.5281/zenodo.7698703
• Publication Date: 2023-03-04
• Authors: Anjuman Shaheen; Siddiqui, Farida

Abstract: The seminal paper by Bodie and Rosanky (1980) started the debate about the role of commodities in portfolio diversification. Commodity futures have gained prominence in recent years among investors seeking to hedge against financial market risks, assuming no correlation between commodities and other financial assets. However, due to the financialisation of commodity markets, commodities exhibit boom-bust price cycles similar to equity markets, calling the benefits of diversification into question. Despite many structural issues, Indian commodity markets have developed rapidly in recent years, creating opportunities for domestic and global investors as well. In this context, this study investigates the phenomenon of spill-over between commodity futures and stock markets using Diebold-Yilmaz dynamic spill-over index methodology (2009, 2012 and 2014). The findings indicate a spill-over between commodity futures and stock markets, raising concerns about the benefits of diversification. Furthermore, the stock market is the net recipient of volatility spill-over, indicating the rising financialisation of the commodity market. Keywords: Commodity futures markets, Stock Market, Volatility Spill-over, Indian economy JEL Classification Numbers: C58, G10