This chapter examines an essential methodology to evaluate the influence of the COVID-19 and Russia-Ukraine conflict surprises and conception statements employed for the dynamic conditional correlation between returns and volatilities of energy commodity indices and Bitcoin. To assess analytically the unexpected component of COVID-19 and Russia-Ukraine conflict surprises, the authors use GARCH-DCC(1,1) model by incorporating a dummy variable which measures the surprise factor during the period of study from January 4, 2016, to April 4, 2022. The results suggest significant and considerable dynamic conditional correlation between energy commodities indices and Bitcoin if COVID-19 pandemic and Russia-Ukraine conflict shocks are incorporated in variance assessments. Additionally, these outcomes demonstrate the financialization phenomena of energy commodities indices and Bitcoin. The authors find that the dynamic conditional correlation between energy commodities indices and Bitcoin start to respond considerably more in the situation of Russia-Ukraine conflict shocks than COVID-19 surprises.
Top1. Introduction
Financial markets are strongly feeling the effects of global crises, and this is nothing new. Climate disasters, pandemics, political unrest, and military conflicts can compromise our security, health, infrastructure and international relations. These sweeping changes are also hurting businesses and the global economy. They cause considerable uncertainty, which poses a significant threat to investments in financial markets.
The COVID-19 pandemic, unfortunately, fits this picture, harming countries' economies and threatening entire stock markets. In Canada and the United States, stock markets quickly lost more than 30%, erasing most of the gains made in recent years. As the progression of the COVID-19 outbreak in these two countries has not yet peaked, it is unclear what is likely to happen in the coming weeks. The COVID-19 pandemic has thrown financial markets into a whirlwind, the uniqueness of this crisis and how business leaders and government officials can support the economy during this particularly intense time.
The COVID-19 pandemic is unprecedented in its scope and global impact, posing challenges to policy makers and the empirical analysis of its direct and indirect effects within the interconnected global economy. The outbreak of COVID-19 in December 2019, the global economy began to feel the pressure of the outbreak of violence that gripped the planet without any immunization for a year or more, organizations, governments and businesses are wondering how best to prepare for likely business and operational disruptions, as are expanding business and the legitimate ramifications of overseeing such a wellness emergency.
With the invasion of Ukraine by Russia on Thursday, February 24, the conflict between the two nations turned into a real war. This could also have serious economic consequences.
11th world power in terms of gross domestic product (GDP), Russia is one of the world's leading exporters of natural gas. It also supplies petroleum, cereals, such as wheat and rapeseed, and industrial metals, such as nickel and aluminum. In this context, one of the first consequences of the war in Ukraine should be an increase in the price of energy and certain raw materials.
On 24 February alone, the price of natural gas rose by more than 25% on the TTF market, a platform located in the Netherlands and considered a benchmark in Europe.
Several factors explain these pressures on energy and commodity prices. First, Russia could voluntarily reduce its offer, in order to exert pressure on the countries, in particular European, likely to impose the heaviest economic sanctions on it. According to a classic market mechanism, with unchanged demand, the price of a good increases when the quantities supplied decrease. On the other hand, in the face of sanctions taken by the United States and Europe, Russia could find itself increasingly isolated and reduce its participation in trade, which would lead other countries to seek alternative sources of energy and therefore more expensive. Finally, the war unleashed in Ukraine could lead to the deterioration of the infrastructures necessary for the export of goods: ports, gas pipelines, oil pipelines, etc.
In France, as in many countries, the mechanisms for setting gas and gasoline prices are complex and only partly depend on natural gas and oil prices. Rising prices on international energy and commodity markets should, however, cause the acceleration of inflation which made a comeback in the United States and Europe last year.
This acceleration in inflation could have two major consequences:
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First, it should weigh on purchasing power, i.e., the ability of households to buy goods and services with their income. If inflation is higher than the increase in household income, then purchasing power declines. This is also the scenario forecast by the National Institute of Statistics and Economic Studies (INSEE) for the year 2022. According to forecasts by the Institute published last December, the purchasing power of households should fall in France by 0.2% in 2022. The “additional” inflation generated by the war in Ukraine should aggravate this phenomenon.
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The acceleration of inflation could then encourage central banks, including the European Central Bank (ECB) for the euro zone and the Federal Reserve (FED) in the United States, to further tighten monetary policies. To limit inflation, they have already announced the forthcoming end of the quantitative easing programs implemented at the start of the Covid-19 crisis, such as the PEPP in Europe, and increases interest rate futures. Due to the war in Ukraine, central banks could accelerate the implementation of these strategies to the detriment of economic activity.