How the pandemic-led volatility in the natural resource commodity indices affect U.S and China markets

Using asymmetric and Markov switching GARCH model on daily time series data from January 22, 2020 to March 22, 2022, the study analyzes the impact of COVID-19 on natural resource commodity index returns in the U.S and China. The results find strong evidence of COVID-19 on the volatility of natural resource commodity index return for both China and the U.S. However, the intensity of this effect varies based on volatility regimes, with the Chinese market experiencing stronger effects during calmer regimes (periods with low intensity in COVID-19 cases) and weaker effects in turbulent regimes (periods with high intensity in COVID-19 cases). This could be due to market control measures in China. In contrast, the U.S market shows a more pronounced COVID-19 effect in turbulent regimes, attributed to the openness of the market and the prevalence of speculative participants. The study suggests that the U.S market participants, driven by a goal to profit from price differences, amplify their activity during turbulent periods, leading to increased volatility transfers during the consecutive spells of high COVID-19 cases. The findings highlight the difference in the structures of financial markets in China and the U.S., thus possessing important policy implications for investors in the sector.