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Do Commodities React More to Time-Varying Rare Disaster Risk? A Comparison of Commodity and Financial Assets

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  • Peng Chen

    (Department of Finance, School of Economics, Jinan University, Guangzhou 510632, China
    Southern China Institute of Finance, Jinan University, Guangzhou 510632, China)

  • Ting Huang

    (Department of Finance, School of Economics, Jinan University, Guangzhou 510632, China
    Research & Development Center, Agricultural Bank of China, Guangzhou 511408, China)

Abstract

Using a rare disaster risk database from almost the last one hundred years, we examine the differences in the reaction of asset prices to rare disaster risk between commodity and financial assets. We first employ time-varying parameter VAR (TVP-VAR) models to investigate the role of rare disaster risk in the price dynamics of major asset markets. The results indicate that disaster risk generally has a more intense and persistent impact on crude oil and stock markets when compared to gold and bond markets. However, the role of rare disaster risk differs substantially between commodity and financial assets, as well as between the short and long term. Moreover, when using a nonparametric causality-in-quantiles method to detect causal relationships, we provide evidence of the nonlinear causality effect of rare disaster risks on asset volatilities, and not their returns, except for crude oil. In addition, we demonstrate that augmenting a diversified portfolio of stock or bonds with gold can significantly increase its risk-adjusted performance. The findings have important implications for investors as well as policymakers.

Suggested Citation

  • Peng Chen & Ting Huang, 2022. "Do Commodities React More to Time-Varying Rare Disaster Risk? A Comparison of Commodity and Financial Assets," Mathematics, MDPI, vol. 10(3), pages 1-25, January.
    • Handle: RePEc:gam:jmathe:v:10:y:2022:i:3:p:445-:d:738577
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    References listed on IDEAS

    as
    1. Dirk G. Baur & Brian M. Lucey, 2010. "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold," The Financial Review, Eastern Finance Association, vol. 45(2), pages 217-229, May.
    2. Jessica A. Wachter, 2013. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," Journal of Finance, American Finance Association, vol. 68(3), pages 987-1035, June.
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    Cited by:

    1. Wei, Yu & Zhang, Jiahao & Bai, Lan & Wang, Yizhi, 2023. "Connectedness among El Niño-Southern Oscillation, carbon emission allowance, crude oil and renewable energy stock markets: Time- and frequency-domain evidence based on TVP-VAR model," Renewable Energy, Elsevier, vol. 202(C), pages 289-309.

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