Indian Journal of Finance

Open Access Open Access  Restricted Access Subscription Access

Financial Contagion between Crude Oil, Gold, and Equity Sectors in India during COVID


Affiliations
1 FORE School of Management, Adhitam Kendra, B-18, Qutub Institutional Area, New Delhi - 110 016, India

   Subscribe/Renew Journal


Purpose : This study examined the financial contagion between crude oil and gold prices with the equity prices of different sectors in the Indian equity market during the recent COVID crisis.

Design/Methodology/Approach : Dynamic conditional correlation (DCC) GARCH model was employed to analyze the behavior of time-varying conditional correlation during the time of COVID-19. For examining the financial contagion, regression analysis was performed on the dynamic conditional correlation and the conditional volatilities of the different markets.

Findings : The DCC model showed a sharp increase in correlations between markets during the COVID19 wave. It also suggested the presence of financial contagion between the crude oil and gold markets and the different equity sectors. It also indicated that the COVID-19 effect on the conditional correlation between gold and equity sectors was temporary. In contrast, it increased the correlation between crude oil and the equity sectors.

Practical Implications : The findings of this study have implications for portfolio diversification methods because higher correlations lower the benefits of diversification.

Originality : This study examined the financial contagion during COVID-19 from crude oil and gold to equity sectors. Not all sectors react in the same way to changes in the prices of these commodities, and some may witness less impact compared to others during the crisis period, which makes it interesting for the study.


Keywords

COVID-19, DCC GARCH, Financial Contagion, Indian Equity Markets, Crude Oil, Gold.

JELClassification Codes : C32, G11,G14

Paper Submission Date : January 24, 2023 ; Paper sent back for Revision : February 18, 2023 ; Paper Acceptance Date : March 5, 2023 ; Paper Published Online : March 15, 2023

User
Subscription Login to verify subscription
Notifications
Font Size

  • Adekoya, O. B., Oliyide, J. A., & Oduyemi, G. O. (2021). How COVID-19 upturns the hedging potentials of gold against oil and stock markets risks: Nonlinear evidences through threshold regression and markov-regime switching models. Resources Policy, 70, 101926. https://doi.org/10.1016/j.resourpol.2020.101926

  • Ahmad, W., Bhanumurthy, N. R., & Sehgal, S. (2014). The Eurozone crisis and its contagion effects on the European stock markets. Studies in Economics and Finance, 31(3), 325–352. https://doi.org/10.1108/SEF-01-2014-0001

  • Ahmad, W., Sehgal, S., & Bhanumurthy, N. R. (2013). Eurozone crisis and BRIICKS stock markets: Contagion or market interdependence? Economic Modelling, 33, 209–225. https://doi.org/10.1016/j.econmod.2013.04.009

  • Akhtaruzzaman, M., Boubaker, S., Lucey, B. M., & Sensoy, A. (2021). Is gold a hedge or a safehaven asset in the COVID–19 crisis? Economic Modelling, 102, 105588. https://doi.org/10.1016/j.econmod.2021.105588

  • Albulescu, C. T. (2021). COVID-19 and the United States financial markets’ volatility. Finance Research Letters, 38, 101699. https://doi.org/10.1016/j.frl.2020.101699

  • Ali, M., Alam, N., & Rizvi, S. A. (2020). Coronavirus (COVID-19) — An epidemic or pandemic for financial markets. Journal of Behavioral and Experimental Finance, 27, 100341. https://doi.org/10.1016/j.jbef.2020.100341

  • Anh, D. L., & Gan, C. (2021). The impact of the COVID-19 lockdown on stock market performance: Evidence from Vietnam. Journal of Economic Studies, 48(4), 836–851. https://doi.org/10.1108/JES-06-2020-0312

  • Au Yong, H. H., & Laing, E. (2021). Stock market reaction to COVID-19: Evidence from U.S. firms’ international exposure. International Review of Financial Analysis, 76, 101656. https://doi.org/10.1016/j.irfa.2020.101656

  • Awartani, B., Aktham, M., & Cherif, G. (2016). The connectedness between crude oil and financial markets: Evidence from implied volatility indices. Journal of Commodity Markets, 4(1), 56–69. https://doi.org/10.1016/j.jcomm.2016.11.002

  • Baek, S., Mohanty, S. K., & Glambosky, M. (2020). COVID-19 and stock market volatility: An industry level analysis. Finance Research Letters, 37, 101748. https://doi.org/10.1016/j.frl.2020.101748

  • Baur, D. G., & McDermott, T. K. (2010). Is gold a safe haven? International evidence. Journal of Banking & Finance, 34(8), 1886–1898. https://doi.org/10.1016/j.jbankfin.2009.12.008

  • Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31(3), 307–327. https://doi.org/10.1016/0304-4076(86)90063-1

  • Bouri, E., Jain, A., Biswal, P. C., & Roubaud, D. (2017). Cointegration and nonlinear causality amongst gold, oil, and the Indian stock market: Evidence from implied volatility indices. Resources Policy, 52, 201–206. https://doi.org/10.1016/j.resourpol.2017.03.003

  • Chiang, T. C., Jeon, B. N., & Li, H. (2007). Dynamic correlation analysis of financial contagion: Evidence from Asian markets. Journal of International Money and Finance, 26(7), 1206–1228. https://doi.org/10.1016/j.jimonfin.2007.06.005

  • Chong, J., Miffre, J., & Stevenson, S. (2009). Conditional correlations and real estate investment trusts. Journal of Real Estate Portfolio Management, 15(2), 173–184. https://doi.org/10.1080/10835547.2009.12089840

  • Debasish, S. S. (2012). Analysis of lead-lag estimates between spot and futures market for selected companies in Indian scenario. Abhigyan, 30(1), 10–22.

  • Dutta, A., Bouri, E., & Noor, M. H. (2021). Climate bond, stock, gold, and oil markets: Dynamic correlations and hedging analyses during the COVID-19 outbreak. Resources Policy, 74, 102265. https://doi.org/10.1016/j.resourpol.2021.102265

  • Engle, R. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business & Economic Statistics, 20(3), 339–350. https://doi.org/10.1198/073500102288618487

  • Gharib, C., Mefteh-Wali, S., & Jabeur, S. B. (2021). The bubble contagion effect of COVID-19 outbreak: Evidence from crude oil and gold markets. Finance Research Letters, 38, 101703. https://doi.org/10.1016/j.frl.2020.101703

  • Gharib, C., Mefteh-Wali, S., Serret, V., & Ben Jabeur, S. (2021). Impact of COVID-19 pandemic on crude oil prices: Evidence from Econophysics approach. Resources Policy, 74, 102392. https://doi.org/10.1016/j.resourpol.2021.102392

  • Heinlein, R., Legrenzi, G. D., & Mahadeo, S. M. (2021). Crude oil and stock markets in the COVID-19 crisis: Evidence from oil exporters and importers. The Quarterly Review of Economics and Finance, 82, 223–229. https://doi.org/10.1016/j.qref.2021.09.007

  • Huang, R. D., Masulis, R. W., & Stoll, H. R. (1996). Energy shocks and financial markets. The Journal of Futures Markets, 16(1), 1–27. https://doi.org/10.1002/(SICI)1096-9934(199602)16:1<1::AID-FUT1>3.0.CO;2-Q

  • Joshi, H., & Dutta, V. (2011). Does foreign market listing results into greater foreign institutional ownership and better market co-integration: Evidence from Indian companies listed on New York stock exchange. Abhigyan, 29(1), 1–9.

  • Kang, S. H., McIver, R., & Yoon, S.-M. (2017). Dynamic spillover effects among crude oil, precious metal, and agricultural commodity futures markets. Energy Economics, 62, 19–32. https://doi.org/10.1016/j.eneco.2016.12.011

  • Kumar, A., & Khanna, S. (2018). GARCH - BEKK approach to volatility behavior and spillover: Evidence from India, China, Hong Kong, and Japan. Indian Journal of Finance, 12(4), 7–19. https://doi.org/10.17010/ijf/2018/v12i4/122791

  • Kumar, A., Khanna, S., Dhingra, S., & Sinha, N. (2022). Financial contagion in European equity markets: Evidence from the US subprime and the Eurozone crises. Indian Journal of Finance, 16(8), 8–28. https://doi.org/10.17010/ijf/2022/v16i8/171372

  • Liu, Y., Wei, Y., Wang, Q., & Liu, Y. (2022). International stock market risk contagion during the COVID-19 pandemic. Finance Research Letters, 45, 102145. https://doi.org/10.1016/j.frl.2021.102145

  • Maghyereh, A. I., Awartani, B., & Tziogkidis, P. (2017). Volatility spillovers and cross-hedging between gold, oil and equities: Evidence from the gulf cooperation council countries. Energy Economics, 68, 440–453. https://doi.org/10.1016/j.eneco.2017.10.025

  • Malik, F., & Ewing, B. T. (2009). Volatility transmission between oil prices and equity sector returns. International Review of Financial Analysis, 18(3), 95–100. https://doi.org/10.1016/j.irfa.2009.03.003

  • Mazur, M., Dang, M., & Vega, M. (2021). COVID-19 and the march 2020 stock market crash. Evidence from S&P1500. Finance Research Letters, 38, 101690. https://doi.org/10.1016/j.frl.2020.101690

  • Mensi, W., Beljid, M., Boubaker, A., & Managi, S. (2013). Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold. Economic Modelling, 32, 15–22. https://doi.org/10.1016/j.econmod.2013.01.023

  • Mensi, W., Hammoudeh, S., Al-Jarrah, I. M., Sensoy, A., & Kang, S. H. (2017). Dynamic risk spillovers between gold, oil prices and conventional, sustainability and Islamic equity aggregates and sectors with portfolio implications. Energy Economics, 67, 454–475. https://doi.org/10.1016/j.eneco.2017.08.031

  • Mensi, W., Reboredo, J. C., & Ugolini, A. (2021). Price-switching spillovers between gold, oil, and stock markets: Evidence from the USA and China during the COVID-19 pandemic. Resources Policy, 73, 102217. https://doi.org/10.1016/j.resourpol.2021.102217

  • Min, H.-G., & Hwang, Y.-S. (2012). Dynamic correlation analysis of US financial crisis and contagion: Evidence from four OECD countries. Applied Financial Economics, 22(24), 2063–2074. https://doi.org/10.1080/09603107.2012.698161

  • Mishra, A. (2019). Foreign exchange, gold, and real estate markets in India: An analysis of return volatility and transmission. Indian Journal of Finance, 13(7), 50–64. https://doi.org/10.17010/ijf/2019/v13i7/145535

  • Narayan, P. K., Devpura, N., & Wang, H. (2020). Japanese currency and stock market—What happened during the COVID-19 pandemic? Economic Analysis and Policy, 68, 191–198. https://doi.org/10.1016/j.eap.2020.09.014

  • Pandey, V., & Vipul, V. (2018). Volatility spillover from crude oil and gold to BRICS equity markets. Journal of Economic Studies, 45(2), 426–440. https://doi.org/10.1108/JES-01-2017-0025

  • Perumandla, S., & Kurisetti, P. (2018). Time-varying correlations, causality, and volatility linkages of Indian commodity and equity markets: Evidence from DCC - GARCH. Indian Journal of Finance, 12(9), 21–40. https://doi.org/10.17010/ijf/2018/v12i9/131558

  • Rahman, M. L., Amin, A., & Al Mamun, M. A. (2021). The COVID-19 outbreak and stock market reactions: Evidence from Australia. Finance Research Letters, 38, 101832. https://doi.org/10.1016/j.frl.2020.101832

  • Raza, N., Shahzad, S. J., Tiwari, A. K., & Shahbaz, M. (2016). Asymmetric impact of gold, oil prices and their volatilities on stock prices of emerging markets. Resources Policy, 49, 290–301. https://doi.org/10.1016/j.resourpol.2016.06.011

  • Roy, R. P., & Roy, S. S. (2017). Financial contagion and volatility spillover: An exploration into Indian commodity derivative market. Economic Modelling, 67, 368–380. https://doi.org/10.1016/j.econmod.2017.02.019

  • Sadorsky, P. (2012). Correlations and volatility spillovers between oil prices and the stock prices of clean energy and technology companies. Energy Economics, 34(1), 248–255. https://doi.org/10.1016/j.eneco.2011.03.006

  • Sakurai, Y., & Kurosaki, T. (2020). How has the relationship between oil and the US stock market changed after the Covid-19 crisis? Finance Research Letters, 37, 101773. https://doi.org/10.1016/j.frl.2020.101773

  • Salisu, A. A., Vo, X. V., & Lawal, A. (2021). Hedging oil price risk with gold during COVID-19 pandemic. Resources Policy, 70, 101897. https://doi.org/10.1016/j.resourpol.2020.101897

  • Scherf, M., Matschke, X., & Rieger, M. O. (2022). Stock market reactions to COVID-19 lockdown: A global analysis. Finance Research Letters, 45, 102245. https://doi.org/10.1016/j.frl.2021.102245

  • Seth, N., & Sidhu, A. (2021). Price discovery and volatility spillover for Indian energy futures market in the pre- and post-crisis periods. Indian Journal of Finance, 15(8), 24–39. https://doi.org/10.17010/ijf/2021/v15i8/165816

  • Siddiqui, S., & Roy, P. (2019). Do Brent crude oil, Nifty 50 and USD/INR exchange rate walk together? An ARDL-bounds testing approach. Abhigyan, 37(3), 33–43.

  • Singh, A., & Kaur, P. (2015). Modelling dynamic volatility spillovers from the U.S. to the BRIC countries’ stock markets during the subprime crisis. Indian Journal of Finance, 9(8),45–55. https://doi.org/10.17010/ijf/2015/v9i8/74562

  • Thuraisamy, K. S., Sharma, S. S., & Ali Ahmed, H. J. (2013). The relationship between Asian equity and commodity futures markets. Journal of Asian Economics, 28, 67–75. https://doi.org/10.1016/j.asieco.2013.04.003

  • Uddin, M., Chowdhury, A., Anderson, K., & Chaudhuri, K. (2021). The effect of COVID – 19 pandemic on global stock market volatility: Can economic strength help to manage the uncertainty? Journal of Business Research, 128, 31–44. https://doi.org/10.1016/j.jbusres.2021.01.061

  • Varma, Y., Venkataramani, R., Kayal, P., & Maiti, M. (2021). Short-term impact of COVID-19 on Indian stock market. Journal of Risk and Financial Management, 14(11), 558. https://doi.org/10.3390/jrfm14110558

  • Zaremba, A., Aharon, D. Y., Demir, E., Kizys, R., & Zawadka, D. (2021). COVID-19, government policy responses, and stock market liquidity around the world: A note. Research in International Business and Finance, 56, 101359. https://doi.org/10.1016/j.ribaf.2020.101359

  • Zeinedini, S., Karimi, M. S., & Khanzadi, A. (2022). Impact of global oil and gold prices on the Iran stock market returns during the Covid-19 pandemic using the quantile regression approach. Resources Policy, 76, 102602. https://doi.org/10.1016/j.resourpol.2022.102602

  • Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36, 101528. https://doi.org/10.1016/j.frl.2020.101528


Abstract Views: 162

PDF Views: 0




  • Financial Contagion between Crude Oil, Gold, and Equity Sectors in India during COVID

Abstract Views: 162  |  PDF Views: 0

Authors

Vikas Pandey
FORE School of Management, Adhitam Kendra, B-18, Qutub Institutional Area, New Delhi - 110 016, India

Abstract


Purpose : This study examined the financial contagion between crude oil and gold prices with the equity prices of different sectors in the Indian equity market during the recent COVID crisis.

Design/Methodology/Approach : Dynamic conditional correlation (DCC) GARCH model was employed to analyze the behavior of time-varying conditional correlation during the time of COVID-19. For examining the financial contagion, regression analysis was performed on the dynamic conditional correlation and the conditional volatilities of the different markets.

Findings : The DCC model showed a sharp increase in correlations between markets during the COVID19 wave. It also suggested the presence of financial contagion between the crude oil and gold markets and the different equity sectors. It also indicated that the COVID-19 effect on the conditional correlation between gold and equity sectors was temporary. In contrast, it increased the correlation between crude oil and the equity sectors.

Practical Implications : The findings of this study have implications for portfolio diversification methods because higher correlations lower the benefits of diversification.

Originality : This study examined the financial contagion during COVID-19 from crude oil and gold to equity sectors. Not all sectors react in the same way to changes in the prices of these commodities, and some may witness less impact compared to others during the crisis period, which makes it interesting for the study.


Keywords


COVID-19, DCC GARCH, Financial Contagion, Indian Equity Markets, Crude Oil, Gold.

JELClassification Codes : C32, G11,G14

Paper Submission Date : January 24, 2023 ; Paper sent back for Revision : February 18, 2023 ; Paper Acceptance Date : March 5, 2023 ; Paper Published Online : March 15, 2023


References





DOI: https://doi.org/10.17010/ijf%2F2023%2Fv17i3%2F172670