This study investigates the evolving connections, risk transmission and volatility spillovers between commodities and global financial markets. It offers an in-depth analysis of shifting relationships, tail risk exposure and market dynamics over time.
To achieve these objectives, this study employs the time-varying parameters vector autoregression (TVP-VAR) framework, the conditional autoregressive value-at-risk (CAViaR-TVP-VAR) model and the time-varying parameter vector autoregressive Barunik–Krehlik (TVP-VAR-BK) model to analyze daily data from January 2, 2023 to August 5, 2024.
Our empirical findings show that the Israeli–Hamas conflict considerably increased risk spillovers, tail risk transmission and the overall interconnectedness between global commodities and financial markets. Energy and agricultural assets emerged as key sources of volatility, while major financial indices, including the US dollar, TA All-Share and MSCI World, played pivotal roles in spreading shocks across sectors. The frequency-domain analysis highlights that crude oil and wheat were dominant in the short term, gold and Bitcoin acted as effective hedging tools over the medium term and over longer horizons, commodity-linked risks remained prominent.
This study has some limitations, such as its focus on the period from January 2023 to August 2024 and its narrow scope, which does not include markets like bonds and real estate. Additionally, the models used may not account for nonlinear dynamics or intraday fluctuations and the conflict is analyzed as a singular event.
These findings have several important insights for financial markets. By highlighting the sectors most vulnerable to shocks, our study emphasizes the importance of being proactive in addressing potential market disruptions. For investors, our results suggest that both commodities and financial markets can be effective channels for transmitting risks. Additionally, commodities offer diversification benefits during times of market distress, helping to absorb economic shocks and reduce potential losses. For portfolio managers, this study underscores the value of diversifying investments across different sectors, exhibiting strong risk transmission mechanisms. By strategically allocating risk, investors can balance exposure and reduce the impact of adverse market movements. Thus, the findings emphasize the need for assigning appropriate risk allocations to mitigate negative spillovers and maintain portfolio stability.
This study explores the influence of the Israeli–Palestinian conflict on various financial sectors, including commodities, financial markets, fixed-income markets, global stock indices and the cryptocurrency market. It examines two key periods: the timeframe before the conflict and the period during the conflict itself. This study examines the impact of conflict on the interconnectedness and risk transmission between commodities and global financial markets. It explores how these relationships evolve, focusing on time-varying dynamics in market connectivity. The research provides a detailed analysis of risk spillovers, highlighting how risk contagion characteristics shift during periods of war instability. This work contributes to the existing literature by offering a deeper understanding of how geopolitical events influence the interactions among different asset classes, enhancing the traditional analysis of risk transmission and market connectivity.
