Interdependence and Lead Lag Relationship Between Financial and Commodity Derivatives Market During Covid-19 Contagion †

ABSTRACT

The paper investigates the connection and interdependence of the Indian stock, commodity derivatives, and foreign exchange markets, as well as the responsiveness of these market linkages during the turbulence caused by Covid-19. The daily closing prices of BSE S&P Sensex, Nifty futures, crude oil prices, exchange rates USD, and commodity derivatives exchange indices MCX Comdex, and NCDEX Agri Index have been used. The VAR model results confirm long-term relationships among the financial, commodity derivatives, and foreign exchange markets and infer that equilibrium prevails in these markets. Further, it confirms that the interdependence of stock and commodity markets reacts to the flow of information to reach a long-run equilibrium. Granger causality confirms bidirectional causality;both stocks, commodity derivatives, and foreign exchange rates influence each other through the flow of information. This study concludes that when markets are moving towards equilibrium, bidirectional portfolio optimization and hedging will not yield benefits through diversification investments in these markets.