Time–frequency relationship between US output with commodity and asset prices

Commodity and asset prices have a well-documented effect on economic growth as manifested through various channels. At the same time, the business cycle influences the commodity and asset prices. Whereas empirical evidence on the effect of commodity and asset prices on the long-run economic growth is ambiguous, most of the previous researches highlight a positive correlation in the short run. The aim of this article is to disentangle the short- and long-run co-movements between US historical business cycles and commodity and asset prices over the period 1859–2013. For this purpose, we use a time–frequency approach and we test the historical influence of oil, gold, housing and stock prices over the output growth. In contrast to other studies, we control for the effect of other prices and monetary conditions, using the wavelet partial coherency. In line with the previous works, we discover that co-movements between economic growth and commodity and assets prices manifest especially in the short run. We also find that stock returns and housing prices have a more powerful effect on the US economic growth rate than the oil and gold prices. The long-run co-movements are documented especially around the World War II. Finally, when controlling for the influence of the interest rate, inflation and other commodity and asset prices, co-movements become weaker in the short run. In general, the oil and housing prices lead the GDP growth, the US output leads the gold prices, while there is no clear causality direction between business cycle and stock prices.     

Financial contagion and volatility spillover: An exploration into Indian commodity derivative market

This study measures the extent of financial contagion in the Indian asset markets. In specific it shows the contagion in Indian commodity derivative market vis-à-vis bond, foreign exchange, gold, and stock markets. Subsequently, directional volatility spillover among these asset markets, have been examined. Applying DCC-MGARCH method on daily return of commodity future price index and other asset markets for the period 2006–16, time varying correlation between commodity and other assets are estimated. The degree of financial contagion in commodity derivative market is found to be the largest with stock market and least with the gold market. A generalized VAR based volatility spillover estimation shows that commodity and stock markets are net transmitters of volatility while bond, foreign exchange and gold markets are the net receivers of volatility. Volatility is transmitted to commodity market only from the stock market. Such volatility spillover is found to have time varying nature, showing higher volatility spillover during the Global Financial Crisis and during the period of large rupee depreciation in 2013–14. These results have significant implication for optimal portfolio choice.     

US economic policy uncertainty and co-movements between Chinese and US stock markets

This paper investigates the impact of innovations in US economic policy uncertainty on the co-movements of China's A/B stock markets with the US stock market. We show that it is the absolute changes in the US economic policy uncertainty index that have a negative impact on the co-movements. The finding is robust to the asymmetric effects of non-policy-uncertainty shocks, to a break in the correlation structure, and to the four Chinese A/B stock markets investigated. Our results provide the first evidence regarding how stock market correlations are driven by policy-related uncertainty shocks in the international context.     

Member states’ pact and industry co-movements in the BRICS markets

Through the existence of supply chain relationships among BRICS (Brazil, Russia, India, China and South Africa), we explore the industry return co-movements of the BRICS markets and the impacts of BRICS-related events on the time-varying conditional correlation and volatility. We find that BRICS-related events have increased industry co-movements and substantially reduced volatility. An asymmetry in industry return co-movements shows a strong response to good news. The first formal BRICS summit in 2009 is the most dominant event influencing BRICS industry co-movements, while there is a significant decline in correlations during the 2013 BRICS event. The financial industries of BRICS have the highest co-movements among sampled industries.     

Policy reforms and asymmetric price transmission in the Zambian and Tanzanian coffee markets

Several governments in sub-Saharan Africa have embarked on various market reforms to improve commodity market performance. However, the success of such market reforms depends partly on the strength of the transmission of price signals between spatially separated markets and between different levels of commodity value chains. This study employs momentum threshold cointegration and error correction models to examine the impact of policy reforms on the transmission of prices between the world coffee market and domestic prices in Zambia and Tanzania. The findings show that in the case of Zambia, where policy reforms liberalized coffee markets, the producer prices respond more swiftly to decreases than increases in world market prices, and this swiftness increased after the policy reforms. For Tanzania, where reforms resulted in increased government intervention, producer prices were found to respond quicker to increases than decreases in world market prices over the period under consideration. However, the period before reforms showed domestic prices responding more swiftly to decreases than increases in world prices, while the post-reform period was characterized by faster responses to increases than decreases in world prices.     

Are Commodity Prices Driven by Fundamentals?

Physical scarcity is hardly sufficient to explain commodity price swings. However, despite of clues of commodity market inefficiency in the last decade, excess volatility in commodity markets emerges only under strong assumptions. When we allow for non‐stationarity in commodity prices and time variation in commodity‐specific risk premia, evidence of commodity market inefficiency becomes significantly weaker. Moreover, there is some evidence of commodity‐specific regime changes in commodity markets, with negligible or even positive correlation between efficiency and market liquidity.     

Bull or bear markets: A wavelet dynamic correlation perspective

In this paper, we contribute to the literature on the international stock market co-movements and contagion, especially during the recent subprime crisis, by researching the interconnections between international stock markets in time-frequency domain.Our innovative approach consists on carrying out a wavelet decomposition of return time series before investigating the correlation dynamics across stock markets during the recent financial crisis. It thus enables us to show how the contagion dynamics between international stock market returns are changing across time scales corresponding to investors with heterogeneous time horizons. Moreover, our results reveal that the contagion dynamics depends on the bull or bear periods of stock markets, on stock markets maturity, and on regional aspects. Therefore, all these finding should be considered from an international portfolio diversification perspective.     

Extreme dependence in price transmission analysis

We propose a generalized procedure that combines conventional price transmission analysis with copula-based dynamic tail dependence, to examine price relationships under extreme conditions. This approach is used to examine Ukrainian wheat markets where export restrictions combined with price surges, 2006–2008 and 2010–2012, have contributed to a turbulent market. The results indicate that domestic prices were effectively insulated from world price shocks, but that a ‘rocket and feathers’ price relation held between domestic flour and wheat prices. These asymmetric price co-movements changed with the degree of restrictiveness of the export prohibitions.     

Financialization of agricultural commodities: Evidence from China

Speculation in the commodity futures market distorts commodity prices, driving them away from rational levels. This phenomenon, which is known as the financialization of commodities, has raised significant concerns in recent years. Particularly, in the agricultural market, ‘financialized’ commodities have been blamed for high world food prices. In this paper, we examine the financialization of agricultural commodities in China. To do so, a time-varying copula is employed to investigate the dependence structure between commodities and stock markets. Four insightful results are obtained. First, positive correlations between agricultural commodities and stock markets demonstrate the financialization of agricultural commodities. Second, the identified correlations are time-varying and idiosyncratic with respect to products. Third, the agricultural commodity market is more closely correlated with the domestic stock market than with the overseas market. Fourth, a growing dependence between commodities and the stock markets is detected and the co-movement became stronger after the global financial crisis.     

The heterogeneous dependence between global crude oil and Chinese commodity futures markets: evidence from quantile regression

This paper explores the dependence between global crude oil and Chinese commodity futures markets across different quantiles of the return distributions. Based on weekly data from 11 June 2004 to 7 July 2017, we address this issue by applying a quantile regression method. This technique provides a more detailed investigation of the dependence. Moreover, considering the structural breaks caused by market turmoil or financial crises, we divide the full period of every commodity sector market into sub-periods based on these break dates to further explore the dependence changes. The empirical results indicate that the dependence between global crude oil and Chinese commodity futures markets is different across quantiles in different commodity sectors. The dependence is significantly positive, except in markets with high expected returns. Additionally, the effects caused by structural breaks are distinctly heterogeneous across quantiles. The effect of the same break on the degree of dependence exhibits an increasing tendency as the quantile level increases, which suggests that markets with high expected returns are more susceptible to crises. Finally, we apply a prediction analysis to further verify the heterogeneity of the commodity sectors, which may be the cause of the heterogeneous dependence.     

Cross market predictions for commodity prices

This paper shows that commodity prices can be predicted from cross-market information by establishing long-run cross-market commodity price equilibrium models, which are characterized by a linear relation between prices across different markets. Using data from five representative commodity markets (oil, copper, gold, corn, and cattle) during the period 2005–2018, we demonstrate that oil and industrial metal markets have formed a long-run price equilibrium with other markets across different commodity families. However, agriculture and gold markets do not tend to have long-run price equilibrium relations with other commodity markets. Furthermore, we show that the absence of a price equilibrium is due to the cross-market liquidity interference effect. After we control for the liquidity effect, long-run cross-market commodity price equilibrium relations are reestablished for agriculture and gold markets. These results can aid in demonstrating that liquidity can capture most of the missing information that is not reflected in price dynamics in less liquid markets, such as agriculture and gold markets. Therefore, less liquid commodity price predictions require both prices and liquidity levels from cross-markets, while liquid commodity prices (oil and metal) can be predicted based solely on cross-market prices.     

Co-movements of GCC emerging stock markets: New evidence from wavelet coherence analysis

This paper examines the short term and long term dependencies between stock market returns for the Gulf Cooperation Council (GCC) Countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) during the period 2005–2010. Our empirical investigation is based on the wavelet squared coherence which allows us to assess the co-movement in both time-frequency spaces. Our results reveal frequent changes in the pattern of the co-movements especially after 2007 for all the selected GCC markets at relatively higher frequencies. We further note an increasing strength of dependence among the GCC stock markets during the last financial crisis signifying enhanced portfolio benefits for investors in the short term relative to the long term. On the financial side, we uncover that the strength of co-movement between GCC markets may impact the multi-country portfolio's value at risk (VaR) levels. These findings provide potential implications for portfolio managers operating in the GCC region who are invited to consider co-movement through both frequencies and time when designing their portfolios.     

Volatility transmission to the fine wine market

The goal of this paper is to explore volatility transmission from various markets to the fine wine market. Knowledge of these channels for transmitting volatility to the wine market allows practitioners to anticipate the future volatility and the consequences of a shock on the wine market, to develop their investment strategy and diversify their risk. We especially analyse the impact of U.S. markets (i.e. art, commodities, credit, financial and real estate) during the 2007–2017 period. We shed additional light on how the volatility of the fine wine market varies during an extended period including a financial crisis. Our results indicate that, in the short-term, volatility is transmitted with a negative effect through the financial and commodity markets and with a positive effect through the art, residential real estate, and credit default markets. In the long-term, the wine market is impacted by all other markets. We show that correlations are time-varying.     

A behavioral cobweb-like commodity market model with heterogeneous speculators

According to empirical studies, speculators place significant orders in commodity markets and may cause bubbles and crashes. This paper develops a cobweb-like commodity market model that takes into account the behavior of technical and fundamental speculators. We show that interactions between consumers, producers and heterogeneous speculators may produce price dynamics which mimics the cyclical price motion of actual commodity markets, i.e., irregular switches between bullish and bearish price developments. Moreover, we find that the impact of speculators on price dynamics is non-trivial: depending on the market structure, speculative transactions may either be beneficial or harmful for market stability.     

Does economic policy uncertainty matter for commodity market in China? Evidence from quantile regression

ABSTRACT

This paper investigates the effect of economic policy uncertainty (EPU) on China’s agricultural and metal commodity futures returns across quantiles. We address this issue using the panel quantile regression approach, which allows for a more complete analysis of various conditions in the commodity market (i.e. bearish, normal, and bullish markets). Our empirical results reveal that domestic EPU shocks have a significantly negative effect on agricultural futures returns in bearish markets and a significantly positive effect on metal futures returns in bullish markets. The impacts of both domestic and U.S. EPU shocks on commodity markets are heterogeneous across quantiles and are sector specific. Additionally, by isolating positive and negative EPU shocks, the regression and test results indicate an asymmetric response of commodity futures prices in bullish markets. Moreover, our findings indicate that the metal futures market has a higher financialisation level than the agricultural futures market. The findings can be utilized by policymakers and investors.     

Exchange market pressure,stock prices,and commodity prices in West Africa

As Africa continues its decade of rapid economic growth, the continent also faces the risk of becoming more susceptible to financial ‘contagion.’ Capital flows and trade linkages might cause one country’s currency market to influence those of its neighbors. Likewise, shocks to global commodity or asset markets might induce a crisis in one or more countries in the region. This study generates monthly measures of exchange market pressure (EMP) for four individual West African countries, as well as for the WAEMU franc zone, from 2002 to 2012. Vector Autoregressive (VAR) methods are then used to test for linkages among them, as well as to analyze the effects of various external price shocks. A number of spillovers are uncovered. More importantly, local connections dominate global ones in the case of stock- and commodity-price declines. Ghana, for example, is shown to be a ‘commodity currency’ when West African commodity prices are included in the VAR, but not when a global index is used.     

Virtual integration of financial markets: a dynamic correlation analysis of the creation of the Latin American Integrated Market

This article investigates the role of virtual integration of financial markets on stock market return co-movements. In May of 2011, the Chilean, Colombian and Peruvian stock markets virtually integrated their stock exchanges and central securities depositories to form the Latin American Integrated Market (MILA). We utilize the dynamic conditional correlation model proposed by Engle (2002) to identify a statistically significant positive correlation between these markets. Moreover, we find strong evidence that the creation of the MILA increased the levels of dynamic correlation between stock returns. A higher correlation was also found during the dot-com bubble and the 2007 financial crises. Our results imply a decline in gains from international diversification by holding portfolios consisting of diverse stocks of these countries.     

Art in Africa: Hedonic price analysis of the South African fine art auction market, 2009–2014

Real asset markets are characterized by illiquidity and heterogeneous assets, presenting challenges to price estimators. Use of a new dataset of 7,553 auction fine art lots brought to market in South Africa, for 2009–14, allows us to examine the full sales hedonic price estimator over a wide set of characteristics. Results validate full sale hedonic pricing: Identities of artists, medium and genre, dating characteristics, and physical characteristics of artwork are significant. External validity of hedonic pricing is supported by out-of-sample price prediction for 40 individual artists. Auction house catalogue presentation of art work also proves correlated with realized auction prices. Art as an asset finds support: art prices move countercyclically with GDP and domestic equity markets, pro-cyclically with off-shore equity markets, implying a risk diversification role. JEL Codes: D1, L8. Keywords: hedonic price equation, art market, South Africa Word Count: 9467 (including all Tables, Figures, References).     

The welfare implications of exchange rate choices in developing agricultural economies

This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an estimated open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets and imperfect asset markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor re-allocation upon commodity price volatility. When labor and product markets are not well-developed, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a novel rationale as to why exchange rate targeting is implemented in many developing agricultural economies.     

The dynamic interrelation between external finance and bank credit

This article studies the interrelation among the volumes of bonds and stocks issued by non-financial firms, and levels of industrial loans outstanding in the United States. These aggregates are co-integrated and characterized by asymmetric volatility. Their co-movements are driven by financial indicators such as the yield spread, size of loan market and market volatility. Bond and stock issuance are positively correlated, and even more so during the expansionary phase of the cycle. Loans outstanding and bond issuance are negatively correlated, and their substitutability increases in periods of economic downturn, highlighting the importance of bond markets to mitigate credit crunches.