Connectedness between Industrial and Rare Earth Metals: Implications for Portfolio Diversification During the COVID-19 Pandemic and the Russia–Ukraine Conflict

This study examines the connectedness in returns and volatility between industrial and rare earth metals during the COVID-19 pandemic and the Russia–Ukraine conflict. For this purpose, we collected daily prices of six industrial and eight rare earth metals from June 16, 2014 to October 31, 2024, and employed the Time-Varying Parameter Vector Autoregression (TVP-VAR) approach. The findings reveal strong returns connectedness between industrial and rare earth metals in the COVID-19 pandemic and the Russia–Ukraine conflict, compared with the pre-COVID-19 pandemic. Moreover, among all metals, copper is the only metal that consistently transmits shocks in returns to the network of other metals, whereas DRM, CRM, nickel and lead consistently receive shocks in returns from other metals in the system. It implies that these four metals have observed most of the market shocks and act as safe-haven assets. It is important to note that BGM acts as a strong net transmitter during COVID-19 and acts as a strong net receiver in the Russia–Ukraine conflict. However, volatility connectedness is weak during the COVID-19 pandemic and the Russia–Ukraine conflict compared with pre-COVID-19 periods, implying that portfolio diversification opportunities exist in both crises. Furthermore, NDM is the only metal that acts as a net transmitter of volatility shocks, whereas zinc, tin, nickel, lead and copper act as net receivers of volatility shocks. These five metals absorbed most of the volatility shocks and act as a safe haven asset in the COVID-19 and the Russia–Ukraine conflict. The bivariate portfolio analysis shows that during COVID-19, the decrease in hedge ratios highlights the difficulty in establishing effective hedges. Interestingly, the increase in hedge ratios during the Russia–Ukraine conflict implies hedging opportunities. The findings of this study have important implications for investors and portfolio managers in managing portfolio risk through hedging and diversifying investment portfolios during periods of economic turmoil.