Speculation or actual demand? The return spillover effect between stock and commodity markets

This article measures the return spillovers between the Chinese and American stock markets and the international commodity market and explores the dominant factors of such cross-market spillovers based on both actual demand and speculative behavior. By adopting a time-varying analysis framework covering many economic variables, we find that there is an increasing trend toward intermarket linkage. (i) When the economic system faces external shocks, the interaction between commodity and financial markets increases, indicating that the adverse external environment generated excessive speculation. (ii) The effect of speculation on the return spillover of the transnational market is far greater than that of actual demand during the same period, but speculation tends to have a short-term effect, while actual demand tends to have a long-term effect. (iii) The interaction between a representative emerging economy and international commodity markets is more dominated by speculation than is the case for advanced economies.