Risk Contagion between Commodity Markets and the Macro Economy during COVID-19: Evidence from China

As the basic raw materials of economic activities, major commodities prices have a significant impact on the real economy. Due to the impact of the COVID-19 pandemic, major commodities prices have been fluctuating sharply in a “deep V” pattern since 2020. Therefore, accurately grasping the risk linkage between commodity markets and the macroeconomy is the key to preventing systemic risk and maintaining the smooth operation of the economy. Based on the MF-VAR model, this paper analyzed the risk contagion between China’s commodity markets and macroeconomic sectors from the perspective of volatility spillover, focusing on risk spillover and its dynamic evolution during the COVID-19 pandemic, and deeply analyzed the transmission mechanism of risk spillover based on the mixed-frequency causality test method. Our findings show that China’s commodity markets are the net exporter of risk contagion and that all macroeconomic sectors are the net recipient of risk contagion. During the period of COVID-19, the risk contagion effect was significantly intensified. The fluctuation of the commodity markets has a long-lasting negative impact on the investment sector and has caused changes in macroeconomic sectors, such as the reduction of medium- and long-term loans, the reduction of money circulation speed, and the weakening of micro-individual consumption willingness. The results of causality analysis show that wealth, interest rate, and expectation effects are present in the risk contagion between the commodity markets and macroeconomic sectors. While being directly or indirectly impacted by the commodity markets, each macroeconomic sector also generates adverse feedback to the commodity markets. The complete description of the risk contagion between the commodity markets and the macro economy has guiding significance for regulatory authorities to improve risk control policies and reinforce the macro regulatory system.