Spillover Effects Between Commodity Markets, Financial Markets, and the Real Economy (Financial Modeling and Analysis)

Abstract

This paper attempts testing linkage between oil market represented as commodity, stock market and international trade market, which is denoted as real economy. The analysis is based on daily market prices and indices from 1990 to 2022. The evidence from Vector autoregression models for linkages of them suggests that correlations are significant but none of the estimates are notably high, and while each market cannot be said to be uncorrelated to the other, it is difficult to conclude that there is a clear correlation. The hypothesis testing with the Granger causality indicates that the international trade market was not causal to the oil and stock markets, however, which is unexpected result from earlier survey. In terms of how each market reacted to the shocks, the oil and stock markets responded quickly, within approximately one day, while the international trade market took nearly 10 days to recover from the shocks. However, the empirical results in this paper are very few as one would expect from earlier studies, and one can infer confounding factors and sample selection issues behind this. Hopefully, this paper will serve as a warning for future empirical analysis of the linkage between oil markets, stock markets, and the real economy.