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High inflation during Russia–Ukraine war and financial market interaction: Evidence from C-Vine Copula and SETAR models

This paper examines the interaction between three financial markets: energy and non-energy commodities, bonds and equities, in a particular context of high inflation worldwide, that of Russia–Ukraine war. Our data cover the period January 2016-October 2022. Using a SETAR-GARCH C-Vine Copula model, w...

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Bibliographic Details
Published in:Research in international business and finance 2024-06, Vol.70, p.102384, Article 102384
Main Authors: Hamza, Taher, Ben Haj Hamida, Hayet, Mili, Mehdi, Sami, Mina
Format: Article
Language:English
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Summary:This paper examines the interaction between three financial markets: energy and non-energy commodities, bonds and equities, in a particular context of high inflation worldwide, that of Russia–Ukraine war. Our data cover the period January 2016-October 2022. Using a SETAR-GARCH C-Vine Copula model, we provide evidence of two inflation breakouts within COVID pandemic and shortly before Russia–Ukraine war, for all assets considered, and particularly for US 10-Year bond, as an inflation-indexed asset. Over the Russia–Ukraine war period, both linear and nonlinear models explain the studied assets’ behavior faced with high inflation. C-Vine Copula analysis shows that oil prices (WTI), as an inflation-producing assets, impact the volatility of financial markets (VIX) in times of war. This analysis indicates also that the NASDAQ index, as an inflation-exposed assets, is sensitive to commodities and energy prices that drive inflation. Furthermore, we find a high positive Kendall’s tau for all combinations between US 10-Year and all other assets. These results provide strong evidence of the association between US 10-Year futures, as a vehicle of inflation, and all studied assets. Lastly, our findings confirm the evidence that Russia–Ukraine war generated two significant shocks, Gas (NG) prices and financial markets’ volatility (VIX). This study is of crucial interest to policy and decision makers to the extent that it provides a framework for understanding, in a context of high inflation, the mechanisms linked to the vehicles for transmitting this inflation, its pricing process, and its impact on the equity market. [Display omitted] •We showed two breakouts within COVID epidemic and shortly before Russia–Ukraine war for all assets especially for US 10-Y.•We underline a strong link between inflation sources and US 10-Year futures.•US 10-Year futures, as an inflation pricer, transmit heavily inflation to equity market volatility (VIX).•US10-Year impacts strongly the NASDAQ index, highly sensitive to long-term interest rate (cash-flows discounting process).•Russia–Ukraine war generated significant shocks, in terms of inflation, and volatility of financial markets (VIX).
ISSN:0275-5319
1878-3384
DOI:10.1016/j.ribaf.2024.102384