Exploring diversification opportunities across commodities and financial markets: Evidence from time-frequency based spillovers

The study examines return spillovers across commodities and financial markets to explore diversification opportunities of commodities against financial markets over time and across different time horizons. The daily data of key traded assets in each asset class, such as precious metals, energy, agriculture and equity ranging from May 1, 2006 to May 21, 2021 are used. The overall spillover index indicates that approximately one-third of return spillovers across financial and commodity markets are explained by the shocks from other variables (interdependence). While the remaining two-thirds of the return spillovers in the system are explained by their own shocks. Further, the directional spillovers reveal isolation of equity (S&P-500) from commodities, while, the pairwise spillovers suggest superiority of gold over other commodities for diversifying the risk with S&P-500. Furthermore, the time and frequency-dependent spillovers show a higher level of spillovers across markets during market uncertainty such as the Global Financial Crisis, the European Debt Crisis and the Covid-19 pandemic peak in March–April 2020, driven mostly by shorter time horizons. Finally, we provide robustness checks to the empirical results at various window sizes and find that the empirical results are not incidental. The results will serve as a guiding tool for investors and fund managers for risk management and portfolio diversification.