The paper examines the relationship between stock, bond and commodity prices in India using the Dynamic Conditional Correlation (DCC) model. The results show that both commodity and stock prices are positively correlated but commodity and bond prices are negatively correlated. There is higher return with less volatility in commodity price, which implies that it is more efficient in asset allocation compared to a traditional asset like bond. When there is an increase in the market risk with stock market volatility, the conditional relation between commodity and stock price declines. It is good news for the investor to make asset allocation to commodity market and vice versa. Similarly, the conditional correlation between commodity price and bond is positive and rising. When bond price rises, it is good for investors to take long position in commodity market than bond.

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.

Applied Finance Journal, Empirical Relationship, Commodity, Stock, Bond Prices, Dynamic Conditional Correlation (DCC), National Stock Exchange (NSE), Multi Commodity Exchange (MCX).