Causal relation and volatility spillover between commodity market and equity market of India using VAR Granger Causality and BEKK-GARCH Model

Abstract

The financial markets play a discerning role in accentuating the growth of industry and commerce whereas, a volatile market has whopping reverberations on economic and financial stability of a country. The interconnectedness and reciprocity among the financial markets in economies are veraciously liable for the pricing of securities and provide investors, hedgers and speculators with copious opportunities for portfolio diversification. In this context, the study has been taken up to explore the relationship between the commodity and stock markets of India. The study has used the daily closing prices of MCX iComdex composite index, BSE Sensex and NSE Nifty 50 index from 1^st January 2016 to 31^st December 2022. The Johansen’s cointegration test estimates the absence of cointegration between the indices under study. The results of VAR Granger Causality Tests substantiate a bi-directional causality between the equity and commodity market of India. Whereas, it refutes any causal relationship between the Sensex and Nifty index. The estimates of BEKK-GARCH model confirm a significant volatility spillover between the two markets. The empirical outcomes of the study have poignant implications for all the stakeholders such as individual and institutional investors, policymakers, government agencies, traders, hedgers and other participants in the financial markets.