Commodity and financial markets’ fear before and during COVID-19 pandemic: Persistence and causality analyses

Commodity and financial markets are leading points of attraction to investors, but are very sensitive to external crises, such as financial and health crises. An example is the overwhelming plunge in the prices of the assets being traded in most of these markets during the COVID-19 pandemic. The pandemic has raised market fear beyond what is historically known, thus calling for an empirical assessment of its degree of persistence. Interestingly, the issue of persistence in financial and commodity markets has not even been generally explored in the literature. Using fractional integration approaches, our findings show that all the considered market fear indices exhibit mean reversion before COVID-19 pandemic, implying that the effect of shocks is transitory. However, persistence is higher during the pandemic period, with fear indices of the gold market (GVZ), energy sector (VXXLE) and Eurocurrency market (EVZ) reaching the unit root zone. The Granger-causality test also reveals that equity market fear due to infectious diseases (EMV-ID) and global market fear (VIX) are responsible for the fear in virtually all other markets during the current COVID-19 pandemic period. Strong policy implications are associated with these findings.