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ENERGY MARKETS

Ahead of the curve

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Finance Res. Lett. https://doi.org/10.1016/j.frl.2022.102728 (2022)

Information is very valuable in both commodity and equity markets and faster access to information can be leveraged for profitable trades. Traders and financial scholars thus are always interested in evidence of information asymmetry between participants in a market or system. Shruti Ashok and colleagues now show that, in the wake of COVID-19, energy commodity markets responded with more foresight than equity markets, with crude oil prices changing in sync across the world in January 2020, even as it took equity markets another couple of months to achieve the same level of consensus about the immediate future.

The researchers studied the time-varying connectivity between Chinese equity and commodity markets, attempting to identify how COVID-19 affected both. They found that initially the equity market response spilled over into the energy commodity market but soon the equity market started to decouple from the commodity market. They then looked for similar phenomena in international crude oil and equity markets and found that there was high conditional correlation between different international crude markets, indicating a high level of consensus in January 2020. This consensus didn’t materialize in equity markets until much later. The researchers suggest that this may be because equity markets expected the pandemic to be ringfenced in China while the energy commodity markets could already foresee global consequences.

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Correspondence to Fouad Khan.

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Khan, F. Ahead of the curve. Nat Energy 7, 300 (2022). https://doi.org/10.1038/s41560-022-01022-9

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