Special Focus Commodity Price Connections: How Does Volatility Spread?

https://openknowledge.worldbank.org/server/api/core/bitstreams/4ae4bae8-2fb7-41a8-8c1e-95f321eb9794/content Commodity price fluctuations are highly consequential for economic conditions in many emerging market and developing economies (EMDEs). Moreover, individual commodity prices often move in tandem with other commodity prices, so determining the origin of price volatility can be challenging. Using a measure of price volatility connectedness across 15 internationally traded commodities over 2006–26, commodity-specific factors are found to dominate price volatility: roughly two-thirds is commodity-specific, while about one-third is associated with shocks in other commodity markets. About half of measured connectedness reflects links within broad commodity groups. Industrial metals and food are the principal net-transmitting groups, while livestock and soft commodities are the main net receivers. At the individual commodity level, copper, maize, oil, and silver stand out as important bridges across groups. Connectedness rises during episodes of global stress: the global financial crisis, the COVID-19 pandemic, Russia’s invasion of Ukraine, and the recent conflict in the Middle East are all associated with increases in cross-market connectedness. These results suggest that market-specific analysis can be complemented by monitoring cross-market transmission, particularly during periods of global stress.