Extreme connectedness and network across financial assets and commodity futures markets

This study investigates the extreme connectedness across S&P 500 and commodity futures markets in various market conditions (bearish, normal, and bullish) using the TVP-VAR model and quantile VAR (QVAR) connectedness approach. Our empirical results provide important implications. First, the dynamic results of TVP-VAR model show an asymmetric and crisis-sensitive connectivity with the S&P 500 stock market acting as the net transmitter of spillovers in the system. The S&P 500 index contributed significantly to the system during the COVID-19 pandemic process. Second, according to the results of QVAR method, the total connectedness index is more pronounced during bearish and bullish market, demonstrating the higher return spillovers during lower and higher quantile. Third, we analyze strong connectedness between the S&P 500 stock and commodity markets in upper and lower quantiles, evidenced by significantly high interdependence during extreme markets, resulting in limited opportunities for portfolio diversification. Finally, the results of hedging ratio show that VIX is the most efficient hedging asset against the risk of S&P 500 stock market. Our findings provide valuable information to investors and policymakers regarding portfolio diversification and risk management during various market conditions.