Crash risk connectedness in commodity markets

ABSTRACT

In contrast to the extant literature on returns, volumes, and volatility spillovers, we examine the crash risk connectedness of 13 commodity markets in the energy, metal, and agricultural sectors, spanning January 2019 to December 2020. We use 5-minute high-frequency data to construct two proxies of daily crash risk and apply spillover analysis and network graphs to show that overall connectedness among commodity uncertainties is most significant in the aftermath of COVID-19. High intra-group connectedness and low inter-group connectedness are observed. Since there is an inter-commodity disconnection and intra-commodity connection, the findings suggest that commodity investors diversify crash risk by choosing commodities from different commodity groups rather than picking from within the commodity group. Interestingly, copper and gas exhibit a disconnection from their respective groups, making them suitable diversifiers for other commodity groups and individual commodities in their own groups. Moreover, this property of copper and gas is not much affected during COVID-19. Crash risk connectedness is asymmetric regarding long- and short-run investment horizons, and fear of 2nd wave of COVID-19 signifies pronounced long-term connectedness. Our findings are robust to the use of the alternative specification. Individual investors and commodity export-dependent economies can learn important implications from our analysis.

KEYWORDS:

• Crash risk connectedness
• energy
• metals
• agriculture
• COVID-19

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Najaf Iqbal

Dr. Najaf Iqbal is an Associate Professor at the Accounting School, Hubei University of Economics, Wuhan, P.R. China. He is a member of the Africa-Asia Center for Sustainability of Business School at the University of Aberdeen, Scotland, UK. He is also an editorial board member at the International Journal of Emerging Markets. He works have appeared in Journals like IRFA, JIFMIM, ANOR,FRL, IREF, RIBAF, IJFE, NAJEF, APE, JEMA, STOTEN, JMNFM, EJIM, ER, JRPO, etc. His research interests include Corporate Innovation, “during and post COVID-19 socio-economy”, Corporate Finance, Financial Institutions, Cryptocurrencies, Financial Contagion and Climate Change Economics.

Muhammad Abubakr Naeem

Dr. Muhammad Abubakr Naeem is an Assistant Professor with the Department of Economics and Finance, United Arab Emirates University, Al-Ain, United Arab Emirates. His areas of research interest include systemic risk, asset pricing, commodity markets, sustainable and conventional financial markets, and hedging strategies. His recent research has been published in Journal of Economic Behaviour and Organization, European Financial Management, International Review of Financial Analysis, Economics Letters, Energy Economics, and Finance Research Letters. He is also serving as an Associate Editor with International Review of Economics and Finance, and a Senior Editor with International Journal of Emerging Markets.

Sitara Karim

Dr. Sitara Karim is an Associate Professor of Finance at Department of Economics and Finance, Sunway Business School, Sunway University, Subang Jaya, Malaysia. Her research interests include Financial Economics, Energy Economics, Financial Markets, Commodity Markets, Sustainable Corporate Governance, and Green Finance.

Muhammad Haseeb

Dr. Muhammad Haseeb is an Assistant Professor of Finance at University of Central Punjab, Pakistan. He is an emerging researcher who is passionate to do research in the area of stock price crash risk, ESG and corporate finance. He wrote many papers in Impact Factor, ABDC and ABS ranked journals. He is always open for research collaboration.