ABSTRACT
The contribution of commodity risks to the systemic risk is assessed in this paper through a novel approach that relies on the stochastic property of concordance ordering of CoVaR. Considering the period that spans from 2005 to 2022 and the VIX as the proxy for the stability of the financial system, we build the stochastic ordering of systemic risk for 35 commodities belonging to four sectors: Agriculture, Energy, Industrial Metals, and Precious Metals. The estimates of the ΔCoVaR signal that contagion effects from commodity markets to the financial system have been stronger during the years 2017–2019. Backtests validate CoVaR as a more resilient risk measure than the VaR, especially during periods of market turmoils. The stochastic ordering of CoVaR shows that severe losses (downside risk) in commodity markets tend to exacerbate systemic financial distress more than gains (upside risk). Commodity risks arising from WTI and EUA are threatening triggers for systemic risk. In contrast, the financial system is less vulnerable to a broader range of scenarios arising from fluctuations in Gold prices. As top contributors to the systemic risk, among the sectors we find Energy and Precious Metals with respect to upside risk and downside risk. The Covid-19 crisis has deeply amplified the systemic influence arising from the downside risk of WTI, Gasoline, and Natural Gas UK and has confirmed the safe-haven role of Gold. © 2022 Elsevier B.V.
ABSTRACT
Consumption of cotton fibre by the world’s textile mills in the 2021/22 season (August 1, 2021-July 31, 2022) is expected to rise by 1.9% compared with the corresponding period a year earlier, according to the International Cotton Advisory Committee (ICAC). This expectation is based on forecasts of a continued recovery after a 12.8% increase in consumption in the 2020/21 season, which followed a 12.5% decline a year earlier as a result of a slowdown in global economic growth and disruption to supply chains resulting from the COVID-19 pandemic. Production of cotton fibre, meanwhile, is expected to rise by 8.4% in 2021/22 after declining by 6.6% in the previous year. As a result, demand will be lower than supply in 2021/22, resulting in a rise in stock levels and, potentially, downward pressure on prices. Despite these developments, however, there has been upward pressure on prices as a result of expectations of strong demand and logistical issues which are impeding supply. According to the Economist Intelligence Unit (EIU), the cotton price will average 128 US cents/lb in the 2021/22 season—45 US cents/lb higher than in 2020/21. Looking ahead, global consumption of cotton fibre is expected to rise by 1.8% in the 2022/23 season, according to the EIU, reflecting an improvement in immunisation from COVID-19 and robust demand in smaller Asian nations. However, there are severe downside risks. These reflect, in particular, the impact of Russia’s invasion of Ukraine which has resulted in a highly uncertain economic environment. At the same time, production of cotton fibre is predicted to rise by 2.8% as the planted area is expected to increase because of the higher cotton price. As a result, production will remain above consumption and so there is likely to be a further rise in the stock level in 2022/23. Consequently, there is expected to be downward pressure on prices. Overall, the cotton price is forecast to average 121 US cents/lb and, if this comes to fruition, the cotton price will be 7 US cents/lb lower than in 2021/22. © Textiles Intelligence Limited 2022.