Do Commodity Prices Cause Financial Instability in the United States? A Time-Varying Perspective through Rolling Window Bootstrap Approach

Muhammad Shahbaz, Syed Jawad Hussain Shahzad, Akassi Kablan and Shawkat Hammoudeh

Chapter 14 in Handbook of Global Financial Markets:Transformations, Dependence, and Risk Spillovers, 2019, pp 335-357 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This chapter examines the casual links between financial instability and commodity prices for the US economy. The monthly data of six commodity indices and US financial instability is used from January 1991 to September 2015. Using the bootstrap full-sample Granger causality test, the results show that causality runs from commodities to financial instability; however, the short-run parameters are unstable. To overcome the limitations of the full sample tests and to accommodate possible regime shifts, we apply dynamic Granger causality using bootstrap and rolling window techniques. Analogous to the parameter stability test results, the results show varying levels of the causal nexuses between commodity prices and financial instability. Over most of the sample period, increase in commodity prices cause financial instability. However, a reinforcing effect is observed during the turmoil market conditions of the global financial crisis in 2007–2008.

Keywords: Market Integration; Risk Management; Risk Assessment; Financial Uncertainty; Volatility; Financial Markets; Financial Development; Country Risks; Sovereign Debt Markets (search for similar items in EconPapers)
JEL-codes: F37 (search for similar items in EconPapers)
Date: 2019
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