Financial contagion in raw materials markets during the COVID-19 pandemic

During periods of global shocks in different markets, we often observe expansion of crisis processes, which can be considered from theoretical and methodological standpoint of financial contagion. This paper aims to study the features of financial contagion transmission in commodity markets under the influence of the pandemic shock. The authors generalize the approaches to understanding the essence of financial contagion, show the complexity and diversity of methods for its study, and give the results of modern research on this problem. The spread of financial contagion through the channels of exchange trade in commodities in the context of the pandemic shock is analyzed. Estimates of intra-market and inter-market contagion in 4 raw materials markets were obtained: energy carriers, precious metals, metals as raw materials for industrial production, agricultural products as raw materials for food industry. For paired bundles of commodities, one-dimensional GARCH models are constructed with the allocation of dynamic conditional correlations in the crisis and pre-crisis periods. Financial contagion was recorded with a significant increase in the average conditional correlations during the crisis period. A comparative analysis of the scale of infection allows us to draw conclusions on different resilience of commodity markets to a pandemic shock. Estimates of intra-market contagion show that most susceptible to infection are the markets of ordinary and precious metals. The energy market turned out to be the most stable, the agricultural products market took an intermediate position. Taking into account the effects of inter-market contagion confirmed a high level of susceptibility to contagion of precious metals market, and also allowed for the ranking of commodity futures by the degree of contagion during the COVID-19 period. On this basis, it is concluded that in conditions of a pandemic, investments in gold are not an effective hedging tool. Some agricultural futures (for pork and oats) may act as diversifiers of investment portfolio, since test statistics confirmed a minimum number of cases of contagion.

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