Modeling tail risk in Indian commodity markets using conditional EVT-VaR and their relation to the stock market


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Investment in commodity markets in India accelerated after 2007; this was accompanied by large price variability, hence, it becomes imperative to measure commodity price risk precisely. It becomes equally important to study the relationship between commodity price variability and the stock market. Hence, this study aims to calculate the tail risk of highly traded Indian commodity futures returns using the conditional EVT-VaR method for risk measurement. Secondly, the linkage between commodity markets and the stock market is also studied using the Delta CoVaR method. Results highlight the following points. There is risk transfer from the extreme increase/decrease in crude oil futures returns to the Nifty Index returns. Both extreme price increase or decrease of crude oil futures driven either by financial or a combination of financial and economic shocks affect the stock market. Zinc and Natural gas futures are not linked to the stock market, which means they can be useful in portfolio diversification. The findings suggest that, in Indian commodity markets, EVT-VaR is a useful tool for measuring risk. Only Crude oil futures shocks affect the stock market, and extreme integration between them becomes more prominent when oil shocks are driven by financial factors. Commodities other than Crude oil are not integrated with stock markets in India.

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    • Figure 1. Rolling VaR values and returns of natural gas futures
    • Figure 2. Rolling VaR values and returns of crude oil futures
    • Figure 3. Rolling VaR values and returns of zinc futures
    • Figure 4. Marginal risk contribution of crude oil futures, zinc futures and natural gas futures returns to stock markets
    • Table 1. Percentage of total contracts of commodity futures traded on MCX
    • Table 2. Descriptive statistics
    • Table 3. Correlations of variables used in the study
    • Table 4. EVT parameter estimates of the Nifty index and commodity futures
    • Table 5. Risk transmission from commodity futures to the Nifty 500 index using CoVaR and Delta CoVaR
    • Table 6. Diffusion channels of commodity risk to Nifty 500 index
    • Conceptualization
      Shalini Agnihotri, Kanishk Chauhan
    • Data curation
      Shalini Agnihotri
    • Formal Analysis
      Shalini Agnihotri, Kanishk Chauhan
    • Investigation
      Shalini Agnihotri, Kanishk Chauhan
    • Methodology
      Shalini Agnihotri
    • Writing – original draft
      Shalini Agnihotri
    • Writing – review & editing
      Shalini Agnihotri
    • Software
      Kanishk Chauhan
    • Validation
      Kanishk Chauhan