How do financial and commodity markets volatility react to real economic activity?

in: Finance Research Letters 47 (Part B), article 102733

DOI: https://doi.org/10.1016/j.frl.2022.102733
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his paper examines the relationship between real economic activity and the financial and commodity markets using two approaches. First, we use the Discrete Wavelet Method to investigate the lead-lag dependence between real economic activity and these markets. Second, we use the Time-Varying Parameter VAR (TVP-VAR) model with stochastic volatility to examine the short- and long-term level of integration among these variables. Our wavelet results show that although the real economic activity shock lead co-movement with the chosen markets, it was led by these markets during periods of economic downturn as evidenced during the COVID-19 pandemic. Regarding the TVP-VAR results, we find that the connectedness between economic activity and the chosen markets is stronger during economic downturns or in the long run.