Impact of the financial crisis on Indian commodity markets: Structural breaks and volatility dynamics

Velappan Shalini and Krishna Prasanna

Energy Economics, 2016, vol. 53, issue C, 40-57

Abstract: The shocks transmitted across the financial markets during the financial crisis resulted in structural changes in commodity volatility. Hence, understanding volatility dynamics in changing scenario is vital for derivative pricing, risk management and monetary policy stabilization. This paper studies the impact of the financial crisis by analyzing the following aspects: 1.) Presence of structural break/regime shift in volatility by deploying Markov and Wavelet model during financial crisis; and 2.) Crisis impact on volatility dynamic behavior such as persistence, leverage and long memory by deploying hybrid Wavelet-EGARCH and fractional integration. Spot prices of 18 commodities were examined, including all sub-sectors of energy, metals and agriculture; Indian commodity indices & sub-indices, global benchmark indices, and also stock indices such as S&P 500, S&P and VIX, Nifty 50. The results show that there was a shift from low to high volatility regime in commodity market returns during the global financial crisis. The duration of stay in each regime, and the convergence and divergence from long run equilibrium were different across commodities; agricultural commodities showed faster convergence to long run equilibrium while metal and energy experienced higher persistence and attracted more financial speculation. The impact of the crisis on agricultural commodities was limited to internationally traded commodities such as sugar and rubber. The common breaks and different volatility dynamics have been attributed to systematic risk and to idiosyncratic components respectively. It was also found that during and after the crisis, more than idiosyncratic risk, it was systematic risk that contributed significantly to the volatility patterns of Indian commodity markets.

Keywords: Financial crisis; Volatility dynamics; Wavelet-EGARCH; Markov regime shift; Hurst exponent (search for similar items in EconPapers)
JEL-codes: C14 C22 C51 G10 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:53:y:2016:i:c:p:40-57

DOI: 10.1016/j.eneco.2015.02.011

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