Page 20 - 2022 Abstract Book RUICHSS_2022_11_17 after conference

University of Ruhuna ISSN: 2706-0063
Matara, Sri Lanka

In the context of Sri Lanka, it is critical to understand how the connection
between the prices of financialised commodities and oil prices affects the domestic
economy. With the depreciating domestic currency and the high dependence on oil,
a spillover effect of financial risk increases the stress between the price movements
in the international market and the risk indicators, creating price uncertainties in the
domestic market.

Therefore, the proposed methodology for examining spillover by Diebold
and Yilmaz (2009), and extended work by Chatziantoniou (2021) is used for the
analysis to provide insight into the connectedness of the commodity market and
assess the spillover effect. This approach allows us to better capture the
connectedness dynamics within the network of our selected financial variables. The
empirical findings of this study will be useful as a source of information in
formulating economic policies for the post-COVID period.

A daily data set including prices of commodities such as oil, corn, cocoa,
gold, cotton, gas and exchange rates, and the financial market index of Sri Lanka for
the period of 1991-01-02–2022.09.23 is used for the analysis. The dataset was
transformed into logarithmic return series for the empirical analysis. The study uses
time-varying parameter vector autoregression (TVP-VAR) to analyze the
connectedness of energy prices, commodity prices and the stock market.

Preliminary data analysis shows that, at the beginning of January 2022, the
level of volatility displayed by the LKR exchange rate and the CSE 100 stock market
index in Sri Lanka was unusually high. Both the price of oil and the price of gas had
a high degree of volatility throughout the same period. The costs of essential
commodities like corn showed high volatility throughout this period. The price
volatility of energy prices was persistent even during the COVID-19 pandemic
period. This is due to the unexpected increase in the prices of commodities and energy
that followed the spillover of US monetary policy to Sri Lanka's economic
fundamentals and commodity market, in addition to the ramifications of the war
between Russia and Ukraine. This occurred due to the spillover of US monetary
policy to Sri Lanka's economic fundamentals and commodity market.

In the year 2022, there was a noticeable uptick in the severity of the risk
spillover associated with the disparity in price between oil and gas. Pre-COVID-19,
oil was considered a net risk transmitter of 1.21%; however, during COVID-19, it
was reclassified as a net spillover receiver of 0.23%. Cocoa went from being a net
receiver of 0.79% of risk pre-COVID-19 to becoming a net transmitter of risk of 2%
during COVID-19. Gas and Corn remained as net receivers of risk spillover values
xix