Portfolio rebalancing in times of stress: Capital markets vs. Commodities

Abstract

<p><big>In light of the events of 2020 and 2022, this study aims to examine the co-movements between the capital markets of the Netherlands (AEX), France (CAC 40), Germany (DAX 30), the United Kingdom (FTSE 100), Italy (FTSE MIB), Spain (IBEX 35), Russia (IMOEX), and spot prices of crude oil (WTI), silver (XAG), gold (XAU), and platinum (XPT) from January 1, 2018 to December 31, 2022. The purpose of this analysis is to answer the following research question: (i) Did the events of 2020 and 2022 increase the shocks between stock markets and WTI, XAG, XAU, and XPT prices? The findings indicate that time series do not follow a normal distribution and are stationary. In response to the question of investigation, we found that during the Tranquil period, it was possible to verify the existence of 28 causal relationships (out of 110 possibilities). During the stress period, there was a very significant increase in the number of causal relationships between the market pairs under analysis (62 causal relationships out of 110 possibilities), including a relative increase in the influence of commodities on capital markets and capital markets on commodities. These findings show that during the events of 2020 and 2022, capital markets and commodities significantly accentuated their co-movements among themselves, indicating that alternative markets such as WTI, XAG, XAU, and XPT do not provide safe-haven properties. These results have implications for portfolio diversification during times of global economic uncertainty.</big></p>