Contagion in Commodity Markets under Financial Stress

Abstract

The relevance of the study is due to the fact that in the conditions of the financialization of the economy, shocks arising in one market can spread rapidly and intensively to other markets, generating the effects of financial contagion. This fully applies to the commodity markets, which occupy a large share of exchange trading. The resulting excess volatility risks should be taken into account both by financial market players when developing optimal portfolio strategies, and by the state when adjusting anti-crisis policy. The purpose of the study is to identify financial contagion in commodity markets during periods of financial stress caused by the pandemic and sanctions, to determine the direction and extent of intermarket contagion. The novelty of the study lies in the construction of stress indices to separate periods of increased volatility in commodity markets, in the application of statistical tests for the co-moments of the return distribution to identify the financial contagion between the markets of energy (oil and gas), precious and non-ferrous metals during the pandemic and sanctions. The result of the study is the identification of a period of increased volatility in commodity markets and its division into two sub-periods based on turning points in the stress index, establishing the direction and extent of financial contagion between commodity markets during these periods. It is concluded that stress in commodity markets is accompanied by intense financial contagion. Moreover, volatility contagion turns out to be higher than return contagion and even higher than contagion caused by anomalies in the return distribution. The main sources and receivers of contagion in different periods are the markets of precious and some non-ferrous metals, and in the period from February 2018 to December 2020, also the oil market. At the same time, the gas market before SMO has demonstrated relative independence from other commodity markets, which made it possible to recommend gas futures as a tool for hedging investment portfolios during a period of increased financial stress.