Twin commodity shocks: A multi-to-one CoVaR analysis of systemic risk spillovers from gold and crude oil to emerging market currencies

This study examines the systemic risk spillovers from gold and crude oil to six major emerging market currencies, with particular attention to the role of U.S. dollar (USD) strength in shaping these risk transmission mechanisms. We develop a multi-to-one Conditional Value-at-Risk (MCoVaR) analysis framework, extending the traditional CoVaR methodology by using time-varying canonical vine copulas to capture the dependence structures among gold, oil, and emerging market currencies. Our findings first reveal positive pairwise dependencies between gold, crude oil, and each currency, with heterogeneous dependence structures in how individual currencies relate to the two commodities. Crucially, the MCoVaR estimates confirm that emerging market currencies experience amplified risk spillovers during joint extreme shocks in gold and oil markets. Moreover, USD strength variation plays a crucial role in shaping commodity-to-currency systemic risk transmission by not only directly influencing the valuations of gold, oil, and emerging market currencies but also indirectly affecting the time-varying dependence between these assets. These findings highlight the importance of systemically accounting for joint commodity shocks in currency risk assessment, especially during periods of sustained USD strength with volatile commodity prices.