Do Unprecedented Shocks Drive the Dynamic Connectedness between Stock and Commodity Markets?

This study explores the impact of infectious disease and geopolitical risks on time varying correlations between stock and commodity returns. Findings suggest that commodities play important roles of hedging and/or safe haven in response to unprecedented infectious disease or geopolitical shocks. Precious metals can hedge against the infectious disease risk in general and act as a safe haven asset during extreme infectious disease periods. Other commodities such as energies, metals and chemicals also show safe haven properties when the infectious disease risk is high. On the other hand, precious metals and chemicals show some hedging properties against geopolitical risks and consistently present the safe haven feature against high geopolitical risks. Interestingly, as a traditional safe haven asset, precious metals lose its safe haven status during the COVID-19 period. This paper highlights the role of infectious disease and geopolitical risks on market correlations, particularly under different macroeconomic conditions. This provides a new insight into the effect of non-financial indicators on financial market connectedness