Natural Gas, Sugar & Coffee Among Most Vulnerable Commodities, Says IIM-Indore Study

Indore (Madhya Pradesh): A groundbreaking study from the Indian Institute of Management Indore reveals how commodity price crashes can ripple across global markets, with natural gas, sugar and coffee facing the highest risk.

The study published in the Journal of Futures Markets sheds light on the risks of commodity price crashes and the effect these crashes have across global markets. Authored by Prof. Debasish Maitra and co-author, the research provides crucial insights into commodities and how their financial vagaries are increasingly influenced by crash risks.

The study employs novel risk measures — Down-to-Up Volatility (DUVOL) and Negative Coefficient of Skewness (NCSKEW) — to assess the likelihood of commodity price crashes. Using high-frequency intraday and daily data across 17 commodities from four major sectors, the research finds that natural gas, sugar, and coffee exhibit the highest crash risks, whereas precious metals display relatively lower volatility. The study also examines key commodity-specific factors, such as speculation, hedging pressure, and basis risk, to determine their impact on crash risk levels. Notably, speculation and hedging pressure were found to significantly increase the probability of crashes, while basis risk played a stabilising role.

One of the major contributions of this research is its examination of crash risk contagion—the spread of crash risk from one commodity to another. The study finds that this spillover effect is asymmetric, remaining moderate at 33% under normal conditions but soaring to 88% during extreme market disruptions. This insight has critical implications for investors, policymakers, and risk managers, who must anticipate and mitigate these risks to prevent widespread market destabilisation.

The research highlights the urgent need for improved risk management strategies in the commodities sector, particularly as commodity markets increasingly resemble equity markets in their volatility patterns. The findings also emphasise the role of financial market players in shaping commodity price dynamics, as factors such as macroeconomic uncertainty, speculative trading, and external financial shocks play an ever-growing role in determining price movements.

As the global economy continues to grapple with inflationary pressures, geopolitical risks, and financial market volatility, understanding commodity crash risks is more important than ever. This study serves as a critical resource for institutional investors, policymakers, and financial analysts looking to develop strategies for mitigating price shocks and ensuring market stability.