How do financial and commodity markets volatility react to real economic activity?

Urom, Christian\ Gideon Ndubuisi\ Khaled Guesmi
External Publications (2022)

in: Finance Research Letters 47 (Part B), article 102733


his paper examines the relationship between real economic activity and the financial and commodity markets using two approaches. First, we use the Discrete Wavelet Method to investigate the lead-lag dependence between real economic activity and these markets. Second, we use the Time-Varying Parameter VAR (TVP-VAR) model with stochastic volatility to examine the short- and long-term level of integration among these variables. Our wavelet results show that although the real economic activity shock lead co-movement with the chosen markets, it was led by these markets during periods of economic downturn as evidenced during the COVID-19 pandemic. Regarding the TVP-VAR results, we find that the connectedness between economic activity and the chosen markets is stronger during economic downturns or in the long run.

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