The complex interconnectedness between the financial market status and the commodities has been the subject of extensive academic research, but few have delved into examining the relationship between liquidity of Group of Three (G3) and Brazil, Russia, India, China (BRIC) countries and global commodity prices. The 2015 study by Ratti, R.A. & Vespignani, J.L., "Commodity Prices and BRIC and G3 Liquidity: A SFAVEC Approach," attempts to explore this subject further.
In their study, Ratti and Vespignani (2015) employed the Structural Factor Augmented Vector Error Correction (SFAVEC) methodology to identify the interactions between the liquidity in G3 and BRIC countries and commodity prices.
The study's main findings include a stark contrast in the liquidity shocks for G3 and BRIC countries and commodity prices. Where liquidity shocks in G3 countries have a positive effect on both energy and non-energy commodity prices, similar shocks in BRIC countries have no significant impact on these prices (Ratti & Vespignani, 2015). Thus, the research offers essential insights into the global macroeconomic environment, especially in emerging economies.
The SFAVEC methodology, as utilized by Ratti and Vespignani (2015), facilitates the analysis involving high dimensional datasets. It allows for the incorporation of useful information about common global factors presumed to impact commodity prices. This technique essentially helps identify the specific impact of liquidity shocks on commodity prices.
Ratti and Vespignani's (2015) examination of the impact of liquidity on commodity prices carries relevance in the contemporary finance sector. Ensuring market stability necessitates understanding the dynamics between global macroeconomic factors and commodity pricing.
One limitation of the study is in its primary focus on BRIC and G3 countries and commoditiy prices. While the research is comprehensive, it would be beneficial to see comparable studies assessing the impact of liquidity on commodity prices in other emerging and developed economies. Moreover, future studies could also consider the role of specific types of commodities in the relationship between liquidity and commodity prices.
Ratti and Vespignani (2015) provide valuable insight into the relationship between commodity prices and BRIC and G3 liquidity. Their contribution to the field through the innovative use of SFAVEC methodology and their nuanced findings underscore the complexities of the global economic environment.
Ratti, R.A. and Vespignani, J.L., 2015. Commodity prices and BRIC and G3 liquidity: A SFAVEC approach. Journal of Banking & Finance, 53, pp.18-33.
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