The relationship between stock, bond and commodity prices became more vibrant after the
recent global financial crisis in 2008. It has been seen that financial investors had been more
active in commodity market since the early 1990s but they were more concentrated on hedge
funds, which provides short-term investment possibility. But after the dotcom crisis1 in
2000, a new paradigm of involvement was created among the financial investors. Basically,
after the dotcom crisis in 2000, there has been a new proportion of involvement in commodity
market, where most of the investors use swap agreement to take long-term position in
commodity indices. Commodity price indices were composites of weighted prices of a broad
range of commodities, including energy, agricultural products and metals (UNCTAD, 2009b).
The financial investors invest in commodity indices to diversify their portfolios and to
minimize risk with no physical transformation of commodities.
The recent global financial turmoil in 2008 gave a lesson to investors to diversify their
portfolios from one market to another market. The portfolio diversification can be achieved through two main channels: firstly, diverting investment to different class of assets, which
have a negative correlation, or secondly, investing in similar class of assets in multiple markets
through international diversification (Cappiello et al., 2006). Therefore, the collapse of
financial market in 2002 and 2008 has brought the attention of policy makers and investors
to look into the relationship between stock price, bond price and commodity price in India.
It is believed that commodity markets can be used for portfolio diversification. Therefore,
different commodity price indices were developed in different commodity exchanges, which
attract billions of dollars of institutional and wealthy individual investment (Tang and Xiong,
2010). In the above backdrop, this paper attempts to empirically examine the relationship
between stock, bond and commodity prices in India.
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