Dynamic connectedness between India's commodity

markets and India's sectoral stock markets:

A multidimensional analysis

Under the guidance of Professor Aswini Kumar Mishra and Kamesh Anand

Submitted By: Group 7

Anshul Goel (2021B3A72863G)

Parth Vaish (2021B3A72867G)

PARMAR JAINILKUMAR (2021B3A71123G)

VEDANT MAMIDWAR (2021B3A82942G)

NISHANTH M S (2021B3A72176G)
Highlights:

1. Dynamic Interconnectedness: The study explores evolving relationships between

India's commodity and sectoral stock markets, analyzing time-varying correlations
and macroeconomic factors to understand changing interdependence and
transmission mechanisms over time.

2. Risk Management and Diversification Strategies: Emphasizing the importance of

comprehending linkages between markets, the research identifies spillover effects,
directional connections, and global trends' impact for effective risk management
and portfolio diversification.

Abstract:
The connections amid the stocks of sectoral markets and commodity markets in India
are one of the most important parts of their financial landscape. In order to ascertain
useful insights for policy makers, researchers as well as investors, this research aims at
exploring the dynamic relationships between these markets. This research will explore
the changing time-varying connections and correlation due to macroeconomic issues
such as inflation rate, exchange rate, interest rate etc. between India’s commodity
market and sectoral equity market. For instance, by comparing agriculture with metals
and energy, it is possible to identify specific commodities that lead or lag the stock
aggregates. Similarly, global developments like global commodity prices as well as
geopolitical events cause a significant impact on Indian commodity market- sectoral
equity linkages Through assessing how an investment mix comprising real estate along
with sector stocks has worked out for Indian investors, this study also provides an
insight into risk-adjusted returns and financial performance metrics. A comprehensive
comprehension is made through econometric models and estimation methods in this
study
JEL Classification:
G10, G14, C32, Q02, E44

Keywords:
Dynamic connectedness, Commodity markets, Sectoral stock markets,
Multidimensional study, Research methodology, Co-movement analysis, Market
sentiment, Quantile dependence analysis, Time-Varying Parameter Vector
Autoregression (TVP-VAR), Supply chain disruptions

ACKNOWLEDGEMENTS

We express our thankfulness to Dr. Aswini Kumar Mishra for his guidance on various
topics throughout this project. Also, thank you to Kamesh Anand, sir, for his helpful
tips on various analyses we can do.

Table of Contents
Dynamic connectedness between India's commodity markets and India's sectoral stock markets:.......1
Highlights ........................................................................................................................................2
Abstract ........................................................................................................................................... 2
JEL Classification............................................................................................................................ 3
Keywords......................................................................................................................................... 3
Acknowledgements..........................................................................................................................3
Table of Contents............................................................................................................................. 4
Introduction .....................................................................................................................................5
Literature Review.............................................................................................................................6
Data.................................................................................................................................................. 9
Methodology.................................................................................................................................. 11
Results and Discussion ................................................................................................................. 14
Conclusion..................................................................................................................................... 17
References......................................................................................................................................20
INTRODUCTION:
In the realm of financial markets, the interconnectedness between various asset
classes holds paramount importance for investors, policymakers, and researchers
alike. Understanding the dynamic relationships between different markets provides
valuable insights into the transmission of information, risk, and investment
opportunities across sectors. In the context of India, a country marked by its diverse
economy and vibrant financial landscape, exploring the dynamic connectedness
between commodity markets and sectoral stock markets stands as a crucial
endeavor. This multidimensional analysis aims to unravel the intricate relationships
and interdependencies between India's commodity markets and its sectoral stock
markets.

Background of the Study:

The nature of India's economy is such that it embraces a vast range of activities,
including agriculture, manufacturing, services, and technology, among others. The
commodity markets are important components of the country's economic system
as they supply essential raw materials and inputs required by other sectors for
production and consumption. On the other hand, stock markets act as the financial
nerve center by providing avenues for raising capital, making investments, and
determining prices. In view of their role in shaping the Indian economy, the dynamics
of their interaction demand attention.

Research into the correlation between commodity markets and stock markets has
been explored by scholars throughout history. Common perceptions hold that
commodity and stock prices are determined by independent factors such as supply
and demand dynamics, profit patterns, and macroeconomic indicators. Nonetheless,
evidence shows a more elaborate structure of interrelationship among these
markets; this is often observed as feedback mechanisms, spill-over effects, or
dependencies across various markets.

In the Indian context, several factors contribute to the dynamic connectedness

between commodity markets and sectoral stock markets. These include changes in
global commodity prices, domestic demand-supply dynamics, regulatory policies,
macroeconomic indicators, investor sentiments, and geopolitical events. Moreover,
the emergence of derivative instruments, such as commodity futures and sectoral
indices, has further intertwined the fortunes of these markets.
Against this backdrop, this multidimensional analysis seeks to shed light on the
nature, extent, and implications of the interconnectedness between India's
commodity markets and sectoral stock markets. By employing advanced
econometric techniques and comprehensive datasets, the study endeavors to
provide valuable insights for investors, policymakers, and market participants,
thereby contributing to a deeper understanding of India's financial ecosystem.
Literature review
Dynamic linkage between the Indian stock market and commodity market

The integration between the Indian stock market and the commodity market is crucial for investors and
portfolio managers. Positive oil price innovations impact the stock market of Norway. Oil price shocks
affect stock market returns of oil producers positively. Structural oil price shocks have a strong impact on
real stock returns in the long run. The relationship between oil price shocks and stock market returns has
been examined for Gulf Corporation Council countries

Does the stock market drive herd behavior in commodity futures markets?

Herd behavior in commodity futures markets was tested using a Markov-Switching

methodology, with evidence found in grains during high volatility states only. Early studies
describe intentional herding as individuals basing investment decisions on collective market
actions, even when they disagree with predictions

Price and Volatility Spillover among Equity and Commodity Markets before and during COVID:
Evidence from India

The paper "Price and Volatility Spillover among Equity and Commodity Markets before and during
COVID: Evidence from India" by Paramita Mukherjee and Samaresh Bardhan contributes to the existing
literature by examining the dynamic interrelations between equity and commodity markets in India,
particularly during the COVID-19 pandemic and the Russia-Ukraine war. Drawing on studies by
Lombardi and Ravazzolo (2016), Maghyereh et al. (2017), and Katsiampa (2019) on volatility spillovers
in emerging markets, as well as research by Khalifa et al. (2014) and Liadze et al. (2022) on the impact of
geo-political events on market dynamics, the paper fills a gap in the literature by focusing on
India-specific volatility spillover effects. By analyzing data from January 2017 to May 2022 and
employing VAR-MGARCH models, the study reveals significant changes in price relationships and
volatility spillovers among stock, gold, and crude oil markets, highlighting the increased connectivity
between these markets during times of economic uncertainty.

Relationships between Commodity Market Indicators and Stock Market Index-an Evidence of
India

Dr. Amalendu Bhunia's study investigates the relationships between commodity market indicators and the
stock market in India from 1991 to 2012. Building on prior research, the study contributes to the
understanding of how commodity indicators, such as crude oil and gold prices, impact the stock market
index. Previous studies by Wang et al. (2010), Gilmore et al. (2009), and Miller and Rattib (2008) have
explored similar connections in different countries, highlighting the complex and dynamic nature of these
relationships. By employing econometric techniques and analyzing daily time series data, Bhunia's
research sheds light on the steady association between commodity indicators and the stock market index
in the long run, providing valuable insights into the interplay between financial variables in the Indian
market context.

DOES THE STOCK MARKET DRIVE HERD BEHAVIOR IN COMMODITY FUTURES

MARKETS?
The debate on commodity financialization is extended to commodity futures markets, with
significant evidence of herd behavior in grains during high volatility states. Conflicting evidence
exists on herding in commodity markets, with studies focusing on the influence of the financial
sector on market prices and return dynamicsStatic regime-based models are utilized to analyze
herd behavior in commodity sectors, with findings indicating varying levels of herding tendencies
across different commodities .

RETURN AND VOLATILITY SPILLOVER AMONG COMMODITY FUTURES, STOCK

MARKET, AND

Scholars have studied the impact of foreign exchange rates on agro commodities. Previous
research focused on the relationship between monetary policies and commodity trade. Studies
have shown a growing interdependence between financial and commodity markets. The
presence of institutional investors has been found to increase the prices and volatilities of
commodity futures. Limited research has explored return and volatility spillover among
commodity, equity, and exchange rates in India.

MARKET VOLATILITY AND CRISIS DYNAMICS: A COMPREHENSIVE ANALYSIS OF U.S.,

CHINA, INDIA, AND PAKISTAN STOCK MARKETS WITH OIL AND GOLD
INTERCONNECTIONS DURING COVID-19 AND RUSSIA–UKRAINE WAR PERIODS

Global financial markets have experienced heightened risk transmissions due to crises like the
Global Financial Crisis (GFC) and the COVID-19 pandemic, leading to increased
interconnectedness among markets. Studies have shown that the COVID-19 pandemic
negatively impacted global equity market returns, creating negative investor sentiments. The
Russia-Ukraine conflict also contributed to heightened volatility in agriculture, metal, and energy
markets, as highlighted by Fang and Shao. Previous research indicates that economic
uncertainty has led to increased volatility among major financial assets

RELATIONSHIP BETWEEN THE INDIAN STOCK MARKET AND THE COMMODITY

MARKET

Previous studies have examined the impact of commodity prices on stock market performance,
focusing on variables like gold, crude oil, and copper. Research has highlighted the importance
of understanding the interrelationship between global commodities (such as crude oil, natural
gas, gold, and silver) and the Indian stock market, with some studies identifying gaps in
correlating these commodities with the Indian economy.
DYNAMIC CONNECTEDNESS IN COMMODITY FUTURES MARKETS DURING COVID-19 IN
INDIA: NEW EVIDENCE FROM A TVP-VAR EXTENDED JOINT CONNECTEDNESS
APPROACH

Research on interconnectedness in financial markets and non-agricultural commodities has

gained traction, focusing on measuring contemporary financial risk and management. Studies
highlight that systemic risk in financial markets can be influenced by factors like market
interconnectedness and the speculative nature of assets such as commodity futures.
Techniques like time-varying parameter vector autoregression (TVP-VAR) combined with joint
connectedness approaches have been employed to analyze dynamic connectedness among
commodity futures, particularly during significant events like the Covid-19 pandemic.

SPILLOVER CONNECTION BETWEEN OIL PRICES, ENERGY RISK EXPOSURE, AND

FINANCIAL STABILITY: IMPLICATIONS FOR THE COVID-19 PANDEMIC

The study explores the nexus between oil prices, energy risk exposure, and financial stability
during the COVID-19 pandemic, highlighting the significant connection between oil prices,
energy risk exposure, and financial stability. Researchers have utilized a SVAR-GARCH-M
model to represent Impulse Response Functions (IRFs) in their analysis, as indicated by Elder
(2003). Definitions of financial bubbles and the role of market speculation in influencing oil
prices have been discussed, emphasizing the impact of economic and energy-related variables
on oil price fluctuations.

A STUDY ON THE RELATIONSHIP BETWEEN INDIAN COMMODITY MARKET AND INDIAN

STOCK MARKET WITH SPECIAL REFERENCE TO EXCHANGES IN INDIA – AN
ANALYTICAL FRAMEWORK

The paper reviews theoretical and empirical studies on the relationship between the Indian
Stock Market and Indian Commodity Market .Previous research by industry experts and
scholars has been analyzed to support the study . Michel Robe (2008) studied the relationship
between the Stock Market and Commodity Market

IMPACT OF GEOPOLITICAL RISK AND CRUDE OIL PRICES ON STOCK

RETURNGeopolitical uncertainties elevate risk levels in pharmaceutical, commodity, and
banking sectors, negatively affecting stock returns .The study highlights the varying effects of oil
prices and geopolitical risks across different sectors and countries, emphasizing the complex
interplay between global economic factors and sector-specific stock performances .Existing
literature supports the findings that current oil prices positively affect pharma and commodity
stock returns in India, aligning with favorable economic conditions and increased demand for oil.
COINTEGRATION AND NONLINEAR CAUSALITY AMONGST GOLD, OIL, AND THE INDIAN
STOCK MARKET: EVIDENCE FROM IMPLIED VOLATILITY INDICES

Prior literature focuses on relationships between crude oil, gold, and stock markets in developed
and emerging economies, with limited attention to India. Studies highlight gold's safe haven
function in India and the importance of nonlinearity in modeling gold-stock relationships. Implied
volatility indices are used to examine relationships across gold, crude oil, and Indian stock
markets, providing forward-looking market uncertainty measures.

EXTREME CONNECTEDNESS OF AGRI-COMMODITIES WITH STOCK MARKETS AND ITS

DETERMINANTS

Agricultural commodities are considered hedging assets due to their different drivers from equity
prices and steadier price movements. Previous studies show a relationship between agricultural
commodities and stock markets, with potential diversification benefits. The study quantifies the
connectedness between agricultural commodities and stock markets, highlighting the impact of
the financial positions of firms on this relationship. Findings suggest that the dynamics of return
connectedness differ in extreme events, emphasizing the limitations of using conditional
averages for analysis. The research identifies determinants of return spillovers at different
quantiles, showing variations in the drivers of spillovers across levels

EFFECTS OF PRICE OF GOLD ON BOMBAY STOCK EXCHANGE SECTORAL INDICES:

NEW EVIDENCE FOR PORTFOLIO RISK MANAGEMENT

Gold returns are significantly independent of the returns of the BSE sectoral indices, highlighting
gold's diversifying force. Gold can predict future returns of Consumer Durables, Oil & Gas, and
FMCG stock indices, aiding investors in market predictions. Gold serves as a hedge against the
IT stock index and is a valuable portfolio diversification tool, aligning with previous literature
findings. Investors can adjust hedging positions based on market conditions, using gold to
reduce portfolio risk and as a haven asset

COMMODITY AND EQUITY MARKETS IN INDIA – LINKAGES AND CO-MOVEMENTS

Studies have shown a lack of significant comovement between commodity and equity markets
in various countries, including the United States and South American countries. Some
researchers have found that during the global financial crisis, there was evidence of
cointegration between commodity and equity markets, especially during the recession and
post-recession recovery periods. The relationship between commodity prices and stock market
behavior has been explored, with mixed findings on the level of correlation and synchronization
between these markets.

VOLATILITY SPILLOVER: EQUITY MARKETS TO COMMODITY MARKETS

Literature highlights the use of GARCH and multivariate GARCH models to analyze volatility
spillover between stock market returns and various commodities. Studies have shown evidence
of volatility spillover effects between commodity markets and stock markets, with varying optimal
hedge ratios across different industry sectors. Research has also focused on volatility spillover
effects among Gulf Cooperation Council countries and the effectiveness of hedging commodity
prices with futures using models like CCC-GARCH and DCC-GARCH.

MEASURING VOLATILITY SPILLOVER AND CONNECTEDNESS OF THE GLOBAL

MARKETS WITH A FOCUS ON INDIA

The interconnectedness of global markets has been a focus of research post the Global
financial crisis of 2007-08, with tudies on volatility spillover and contagion risk intensifying .
Researchers have utilized techniques like multivariate regression and GARCH models to
analyze the impact of systematic shocks such as the COVID-19 pandemic on financial and
economic meltdown, leading to unprecedented spillover implications

COVID IMPACT ON INDIAN STOCK MARKET AND COMMODITY

The COVID-19 pandemic significantly affected the Indian stock market and commodity
exchange, leading to volatility and instability . Market dynamics responded well during the
lockdown period in India, with investors anticipating the situation and adjusting their investments
accordingly . The pandemic increased market volatility and disrupted the established
relationship between market inflation and returns, potentially leading to a stock market
meltdown . The study highlights the importance of understanding the specific characteristics of
the Indian market and prompt regulatory responses to control market volatility and investor
sentiment .

QUANTILE DEPENDENCIES AND CONNECTEDNESS BETWEEN STOCK AND PRECIOUS

METALS MARKETS

The empirical literature extensively explores the relationship between stock indices and
precious metals, with a focus on gold as a unique asset with strategic economic importance .
Gold is considered a hedge due to its zero correlation with stock price movements, making it an
ideal risk mitigator in portfolios . Different precious metals exhibit varying behaviors in response
to market conditions, with gold and silver often serving as hedges during economic uncertainty,
while palladium and platinum may act as safe havens during market downturns
DATA
Considering the availability of overall data and sufficient sample data, we divide India's
commodity markets into five different categories: Metals (Dry Iron Ore), Energy Index (EI),
Agriculture (Cotton), Crude Oil, and Gold. According to the classification of the National Stock
Exchange (NSE) and Bombay Stock Exchange (BSE), we divide the stock market into 10
categories: S&P BSE Energy (Energy), S&P BSE FMCG (Fast-moving consumer goods),
NIFTY Pharma (Pharmaceutical), NIFTY Finance (Finance), NIFTY Information Technology
(Information Technology), NIFTY Consumption (Consumption), S&P BSE Telecom (Telecom),
and NIFTY Utilities (Utilities), S&P BSE AUTO(Automobiles) AND NIFTY 50.

All the data on these commodities and stock markets date from January 1st, 2011, to February
1st, 2024, and were obtained from the NSE, BSE, investing.com, and INDEXMUNDI databases.
The descriptive statistics of each variable are depicted in Table 1. According to the Jarque-Bera
test (JB test), all the variables reject the assumption of normality of the return contribution. More
specifically, the kurtosis of all the variables is mostly different from 3, and the skewness of the
variables is approximately skewed, except for that of the NIFTY Pharma, NIFTY AUTO, and
Gold. This means that it is inaccurate for us to consider the relationship between commodity
markets and sectoral stock markets from the traditional assumption of normal distribution.
According to augmented Dickey Fuller (ADF) and Phillips-Perron (PP) tests, all the variables are
stationary.

Table 2 illustrates the correlation matrix between different commodities and sectoral stock
markets. As we can see, the NIFT 50, NIFTY AUTO, NIFTY CONSUMER, NIFTY FINANCE,
and BSE Energy are more relevant to other markets. Due to the development of India's
automobile industry and the increase in people's demand, automobile-related industries and
consumption-related industries are more closely linked with other markets. In stark contrast,
agriculture-related industries, such as cotton, have a lower correlation with other markets, while
gold and manufacturing-related industries such as iron are negatively correlated.
Empirical Analysis:

Diebold and Yilmaz's spillover analysis

Diebold and Yilmaz's spillover analysis is a method used in economics and finance to examine
the transmission of shocks or volatility between different financial markets or assets.

The basic idea is to quantify the degree to which changes in the volatility of one market or asset
affect the volatility of another market or asset. This analysis helps to understand the
interconnectedness and transmission of risks across markets.

Diebold and Yilmaz's approach involves estimating a vector autoregression (VAR) model using
the volatilities of multiple assets or markets as variables. Then, they decompose the forecast
error variance of each market's volatility into components attributed to its own shocks
(own-volatility spillovers) and the shocks from other markets (cross-volatility spillovers).

The key outputs of their spillover analysis include:

Total Spillover: The total volatility spillover from other markets to the market of interest.
Net Spillover: The net spillover after subtracting the spillovers from the market of interest to
other markets.
Directional Spillover Index: This measures the net directional influence of one market's
volatility on another. It indicates whether volatility tends to transmit more from one market to
another or vice versa.

Extreme Spillover Analysis

Extreme spillover analysis is a powerful tool used in financial research to delve into the intricate
dynamics of market interactions during periods of heightened volatility or crisis. This analytical
approach provides insights into how shocks or disturbances propagate between different
financial markets or assets when conditions reach extremes. Here's how it works and what it
reveals:

Methodology: Researchers typically employ rolling windows or specific timeframes to assess

extreme spillover effects. These periods are often characterized by quantiles, such as the lower
(e.g., 10th percentile) and upper (e.g., 90th percentile) tails of the distribution.

Key Findings:
● Total Spillover Index: This metric quantifies the overall transmission of shocks or volatility
between markets during extreme conditions. It offers a comprehensive view of the
interconnectedness between markets when stress levels are high.
 ● Contribution to Others and From Others: By analyzing how much each market
contributes to, and receives from, spillover effects during extremes, researchers gain
insights into the flow of information and contagion dynamics.
● Market Identities: Understanding whether markets act as net transmitters or net
receivers of spillover effects sheds light on investor behavior and market preferences
during crises.
● Dynamic Spillover: Tracking the evolution of spillover effects over time during extreme
events helps uncover changing patterns of market interconnectedness.
● Asymmetric Spillover: Investigating whether spillover effects exhibit symmetry or
asymmetry across different quantiles provides valuable information on market behavior
during periods of stress.

Implications:
● Portfolio Management: Insights from extreme spillover analysis aid investors in adjusting
their portfolios to navigate increased market interconnections and volatility during
extreme events.
● Risk Management: Regulators and policymakers can leverage findings from this analysis
to formulate effective risk mitigation strategies, particularly during times of market
turmoil.
● Market Dynamics: Understanding how markets interact and influence each other during
extremes enhances decision-making for market participants and stakeholders, fostering
a deeper comprehension of financial market dynamics.

Short- and Long-Term Spillover Analysis

Short- and long-term spillover analysis is a fundamental approach used in financial research to
investigate the transmission of shocks or volatility between different markets or assets over
varying time frames. This analytical method dissects spillover effects into short-term,
high-frequency dynamics and long-term, low-frequency trends, providing insights into the
dynamics of market interactions.

Methodology:
● Short-term spillovers typically pertain to effects lasting for shorter durations, often
defined as less than 5 days. These focus on capturing rapid market movements and
high-frequency fluctuations.
● Long-term spillovers, on the other hand, extend beyond short-term periods,
encompassing slower-moving trends and low-frequency fluctuations over extended time
horizons.

Key Findings:
● Dynamic Total Spillover Effects: Analysis reveals significant differences in short- and
long-term spillover behaviors across markets or assets.
 ● Magnitude of Spillover: Short-term spillover effects often dominate, capturing a
substantial portion of total spillovers. Long-term effects, while present, may constitute a
smaller proportion of the overall spillover.
● Directional Spillover Characteristics: Short- and long-term spillover contributions may
exhibit correlations, with markets that influence others significantly in the short term often
maintaining similar impacts over the long term.
● Net Spillover Effects: Market sectors or assets may display varying degrees of net
spillover effects over both short and long terms. Some sectors may consistently exhibit
positive net spillovers, while others may show negative net spillovers, indicating
differential impacts on other markets.

JB TEST :
According to JB test in our time series data the data deviates significantly from normality,
suggesting that the distribution of stock index prices may exhibit skewness and kurtosis that
differ from a normal distribution. So meaning stock price at any given month maynot necessarily
be within 3 standard deviations from mean value of stock prices since we considered 1%
significance level.

ADF TEST :
A pass in the Augmented Dickey-Fuller (ADF) test in our time series data suggests that the data
exhibits stationarity and we reject null hypothesis of non stationarity. This means that over time,
the mean, variance, and covariance between equal lags of the monthly returns of indices are
not changing much w.r.t time.

KPSS TEST :
A fail in the KPSS test in our time series data suggests that the data exhibits stationarity and we
fail to reject null hypothesis of stationarity. This means that over time, the mean, variance, and
covariance between equal lags of the monthly returns of indices are not changing much w.r.t
time.

SKEWNESS :
Monthly returns of Nifty Pharma, Nifty Auto, Nifty 50, Agri cotton, Gold indices are moderately
skewed meaning it suggests that there are more months with negative/positive returns and than
the other depending on whether it’s left or right skewed.

Monthly returns of Nifty IT, Nifty FMCG, Nifty Finance, BSE energy, Crude oil, metal, BSE
Consumption, BSE Telecommunications indices are almostic symmetric meaning there are
almost same number of months with positive and negative returns.
KURTOSIS :
Nifty IT, Nifty FMCG, BSE Energy, Gold, Metal, Nifty consumption, Nifty Telecommunications
indices pass the Kurtosis test meaning lighter tails showing that the distribution has less
extreme outcomes (both positive and negative) than what would be expected under a normal
distribution.

Nifty Pharma, Nifty Finance, Nifty Auto, Nifty 50, Agri, Crude Oil indices fail the Kurtosis test
meaning heavier tails showing that the distribution has more extreme outcomes (both positive
and negative) than what would be expected under a normal distribution.

Q(2) - Box-Pierce and Q^2(2) - Ljung-Box :

All the indices in our research pass this test and suggest that there is no significant
autocorrelation upto lag 2 meaning that monthly returns of the indices are independent of the
previous 2 monthly returns i.e lag of 2 data points.

Spillover Analysis :
Methodology - Econometric Models and Estimation
Methods
1) Introduction
This chapter explains the methodology used by the researcher in conducting the
research work. It presents the list of elements constituting the population of the
study. It consists the following subsections: population of the study, research design,
sample size and sampling technique. The chapter also explains the appropriate
method used in sourcing data and how such data would be summarized in tables.
Finally, the statistical methods of data analysis adopted and the variables of the
study are also part of this chapter. Research methodology is said to back bone of
research. For every comprehensive research a proper research methodology is
indispensable & it has to be properly conceived. The methodology followed by us is
as follows:-

2) Population of the Study

The population for this study consists of various stock exchanges of India and all the
commodities markets. The time frame considered for the study is from 2010-2024.

3) Sample Size and Sampling Technique

As the data was collected on monthly basis and the total years taken in to
consideration the data of 15years i.e. from 2010-2024.So we have a sample size of
150+ months. As we have used the authentic sources of the data like BSE India,
MCX and other valid sources.

4) Variables of the Study:

There are two sets of variables covered by this study. These are the dependent and
independent variables.
Dependent variable The dependent variable in this research is the BSE India which
was taken into consideration to find out its relationship with the commodity market.

Independent variable The independent variables considered were Gold, Crude Oil,
Natural Gas, Metals and Cotton the context of the Indian Stock Market. Techniques
of Data Analysis The techniques for analysis that are used in research includes
Descriptive statistics ADF unit root test, Granger Causality and all the other related
tests However, for the purpose of this study, we decided to make use of multiple
regression to test hypotheses in their null form to arrive at the final conclusion.
5) Brief introduction about the tests.

Normality of Residual Test (Jarque Bera test):

This test is used by most of the research scholars in order to determine whether the
disturbance term or error term is normally distributed or not. As in this the null
hypothesis is the error term is normally distributed while at the same time, the
alternate hypothesis would be Null hypothesis is not normally distributed. The rule to
reject or accept the hypothesis is depend on the P-value and the JB statistics value
if the JB statistic value is less than the critical value then the null hypothesis is
rejected otherwise accepted.
The Jarque-Bera test is a two-sided goodness-of-fit test suitable when a fully
specified null distribution is unknown and its parameters must be estimated.
The test is specifically designed for alternatives in the Pearson system of
distributions. The test statistic is

where n is the sample size, s is the sample skewness, and k is the sample kurtosis.
For large sample sizes, the test statistic has a chi-square distribution with two
degrees of freedom.

Granger Causality:
According to Gujarati and Dawn (2009), though multivariate analysis variable might
have effects on another variable, however it doesn't essentially denotes effort. The
existence of a relationship between variable doesn't show relation or the trend or
impact. We will apply the sodbuster causality/ Block erogeneity Wald check (Enders,
2003). This check detects whether or not the lags of 1 variable will Granger-cause
the other variables within the volt-ampere system. The null hypothesis is every one
that everyone lags of 1 variable is excluded from each equation within the
volt-ampere system.

Let us consider three variables Xt , Yt , and Wt preset in time series data.

Case 1: Forecast Xt+1 based on past values Xt .

Case 2: Forecast Xt+1 based on past values Xt and Yt.
Case3 : Forecast Xt+1 based on past values Xt , Yt , and Wt, where variable Yt has
direct dependency on variable Wt.

Here Case 1 is univariate time series also known as the autoregressive model in
which there is a single variable and forecasting is done based on the same variable
lagged by say order p.
The equation for the Auto-regressive model of order p (RESTRICTED MODEL, RM)

Xt = α + 𝛾1 X𝑡−1 + 𝛾2X𝑡−2 + ⋯ + 𝛾𝑝X𝑡−𝑝

where p parameters (degrees of freedom) to be estimated.

In Case 2 the past values of Y contain information for forecasting Xt+1. Yt is said to
“Granger cause” Xt+1 provided Yt occurs before Xt+1 and it contains data for
forecasting Xt+1.
Equation using a predictor Yt (UNRESTRICTED MODEL, UM)

Xt = α + 𝛾1 X𝑡−1 + 𝛾2X𝑡−2 + ⋯ + 𝛾𝑝X𝑡−𝑝 + α1Yt-1+ ⋯ + α𝑝 Yt-p

2p parameters (degrees of freedom) to be estimated.

If Yt causes Xt, then Y must precede X which implies:
Lagged values of Y should be significantly related to X.
Lagged values of X should not be significantly related to Y.

Case 3 can not be used to find Granger causality since variable Yt is influenced by
variable Wt.

Pearson correlation coefficient

The Pearson correlation coefficient (r) is the most widely used correlation coefficient
and is known by many names:
1. Pearson’s r
2. Bivariate correlation
3. Pearson product-moment correlation coefficient (PPMCC)
 4. The correlation coefficient

The Pearson correlation coefficient is a descriptive statistic, meaning that it

summarizes the characteristics of a dataset. Specifically, it describes the strength
and direction of the linear relationship between two quantitative variables.

Although interpretations of the relationship strength (also known as effect size) vary
between disciplines, the table below gives general rules of thumb:

The Pearson correlation coefficient is also an inferential statistic, meaning that it can
be used to test statistical hypotheses. Specifically, we can test whether there is a
significant relationship between two variables.

Robustness
1. Hodrick-Prescott (1981 & 1997) filter

It minimizes the following functions:

 where λ is the smoothing parameter.

Since HP filters are criticized in the context of a large sample of very

heterogeneous countries, we cross-check our findings using alternative
filtering methods, such as

2. Baxter-King Random Walk

3. Christiano-Fitzgerald Random Walk
4. Hamilton’s Filtering Method

where, as before, yt = τt + ct. The non-stationary part of the regression

provides the cyclical component:

while the trend is given by

ADF TEST :

The ADF test is a widely used test for checking the stationarity of a time series, and it checks for
the presence of a unit root in the data

1. Null Hypothesis (H0): The null hypothesis of the ADF test is that the time series data
contains a unit root, indicating that it is non-stationary.

2. Alternative Hypothesis (H1): The alternative hypothesis is that the data is stationary,
meaning it does not contain a unit root.

3. Failure to Reject the Null Hypothesis: If the p-value obtained from the ADF test is above
a chosen significance level, you fail to reject the null hypothesis.

KPSS TEST :
The KPSS (Kwiatkowski-Phillips-Schmidt-Shin) test is used to test the null hypothesis that a
time series is stationary against the alternative hypothesis that it is non-stationary. The
hypotheses for the KPSS test are as follows:

● Null Hypothesis (H0): The time series is stationary.

● Alternative Hypothesis (H1): The time series is non-stationary.
SKEWNESS:
In statistics, skewness is a measure of the asymmetry of the probability distribution of a random
variable about its mean. In other words, skewness tells you the amount and direction of skew
(departure from horizontal symmetry).

The skewness value can be positive or negative, or even undefined. If skewness is 0, the data
are perfectly symmetrical.

· If skewness is less than -1 or greater than 1, the distribution is highly skewed.

· If skewness is between -1 and -0.5 or between 0.5 and 1, the distribution is

moderately skewed.

· If skewness is between -0.5 and 0.5, the distribution is approximately symmetric.

KURTOSIS
If the kurtosis test "passes," it means that the kurtosis of the dataset is not significantly different
from that of a normal distribution. In other words, the data does not show a substantial
departure from normality in terms of its kurtosis.

On the other hand, if the kurtosis test "fails," it indicates that the kurtosis of the dataset is
significantly different from that of a normal distribution. This suggests that the data may exhibit
more extreme tails or a different peak compared to a normal distribution. In practical terms, a
significant departure from normal kurtosis might affect the validity of statistical tests and
assumptions based on the normality of the data.

Q(2)

The Q(2) test, also known as the Box-Pierce Q test, is a statistical test used to determine
whether there is evidence of autocorrelation in a time series up to a specific lag, in this case, lag
2.

When the test fails (i.e., the computed Q statistic exceeds the critical value), it means that there
is evidence of autocorrelation in the time series up to lag 2. This suggests that the values in the
time series are dependent on each other up to that lag, violating the assumption of
independence typically required in many statistical analyses.

On the other hand, when the test passes (i.e., the computed Q statistic does not exceed the
critical value), it means that there is no significant evidence of autocorrelation in the time series
up to lag 2.
Q^2(2) TEST

The Q^2(2) test, also known as the Ljung-Box Q test, is another statistical test used to
determine whether there is evidence of autocorrelation in a time series up to a specific lag,
similar to the Q(2) test.

When the test fails (i.e., the computed Q^2 statistic exceeds the critical value), it means that
there is evidence of autocorrelation in the time series up to lag 2. This suggests that the values
in the time series are dependent on each other up to that lag, violating the assumption of
independence.

On the other hand, when the test passes (i.e., the computed Q^2 statistic does not exceed the
critical value), it means that there is no significant evidence of autocorrelation in the time series
up to lag 20.

Difference between Q(20) and Q^2(20) test :

The Box-Pierce test is a simplified version of the Ljung-Box test.

Let n = length(x), rhoi = autocorrelation of x at lag i, k = lag

Box-Pierce test statistic = n * (rho1^2 + rho2^2 + ... + rhok^2)

Ljung-Box test statistic = n*(n+2)*(rho1^2/(n-1) + rho2^2/(n-2) + ... + rhok^2/(n-k)

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