Causality Analysis of COVID-19 Induced Crashes in Stock and Commodity Markets: A Topological Perspective

TL;DR

This study applies topological data analysis and Granger-causality to understand the interdependence and causality between US stock and commodity markets during COVID-19 crashes, revealing bidirectional influences and sector interdependence.

Contribution

It introduces a novel combination of Topological Data Analysis and Granger-causality to analyze market crashes and interdependence during COVID-19, highlighting topological differences and causal directions.

Findings

Bidirectional Granger-causality during the crash

Greater interdependence between sectors during the crisis

Topological differences signal market crashes

Abstract

The paper presents a comprehensive causality analysis of the US stock and commodity markets during the COVID-19 crash. The dynamics of different sectors are also compared. We use Topological Data Analysis (TDA) on multidimensional time-series to identify crashes in stock and commodity markets. The Wasserstein Distance WD shows distinct spikes signaling the crash for both stock and commodity markets. We then compare the persistence diagrams of stock and commodity markets using the WD metric. A significant spike in the $WD$ between stock and commodity markets is observed during the crisis, suggesting significant topological differences between the markets. Similar spikes are observed between the sectors of the US market as well. Spikes obtained may be due to either a difference in the magnitude of crashes in the two markets (or sectors), or from the temporal lag between the two markets suggesting information flow. We study the Granger-causality between stock and commodity markets and also between different sectors. The results show a bidirectional Granger-causality between commodity and stock during the crash period, demonstrating the greater interdependence of financial markets during the crash. However, the overall analysis shows that the causal direction is from stock to commodity. A pairwise Granger-causal analysis between US sectors is also conducted. There is a significant increase in the interdependence between the sectors during the crash period. TDA combined with Granger-causality effectively analyzes the interdependence and sensitivity of different markets and sectors.