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1. INTRODUCTION
The sudden upsurge in commodity markets from 2002 and their subsequent fall since
September 2008 has invigorated the debate on the role of commodities for strategic and
tactical asset allocations. Further, significant gush in the trade volumes in general and
large volumes of positions held by long only commodity index funds have galvanized the
logomachy over whether a price bubble existed in these markets. The debate has even
found its way into the corridors of the United States Congress, where legislators were
contemplating measures to curb excessive speculation (Lieberman, 2008). Certain hedge
fund managers, some policy makers, and commodity end users were of the belief that
there existed a bubble in these markets (Gheit 2008; Masters 2008; Masters and White
2008). However, on the other side, quite a few of academic economists were skeptical of
the bubble theory, stating lack of empirical evidence (Krugman 2008; Pirrong 2008;
Sanders and Irwin 2008).
Instead, this anti-bubble brigade viewed that, markets are driven by fundamental factors
And accordingly commodities are pushed to considerably high levels (Irwin and Good,
2009).Global Financial Crisis has indeed made a historic impact on the financial markets
All across the globe. The markets besides behaving terribly nervous during the crisis period
have experienced sharp falls during the crisis period. Since during the recession times
investors generally look out for more safe investments like gold and crude oil, it is of
academic interest now for us, in this study, to discover how the commodity markets behaved
during the period and thereby draw appropriate inferences and reflections on the episode.
Portfolio management concerns the constructions and maintenance of a collection of
investment. It is investment of funds in different securities in which the total risk of the
portfolio is minimized, while expecting maximum return from it. It primarily involves
reducing risk rather than increasing return. Return is obviously important though, and the
ultimate objective of portfolio manager is to achieve a chosen level of return by incurring
the least possible risk.Determinants of risk attitudes of individual investors are of great
interest in a growing area of finance known as behavioral finance. Behavioral finance
focuses on the individual attributes, Psychological or otherwise, that shape common
financial and investment practices. Unlike traditional assumptions of expected utility
maximization with rational investors in efficient markets, behavioral finance assumes
people are normal.
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Despite great interest in this area, not much research looks at the underlying factors that
may lead to individual differences and play a significant role in determining peoples
financing and investment strategies in emerging markets. Study of risk perception and its
impact on investment behavior is one of the core investigation issues of behavioral
finance research.
As such, we attempt to ascertain the answers for the following questions;
(i) Do the commodities too fall when the equities fall? If so, to what extent?
(ii) How is the relationship between commodity markets and equity markets?
This study aims to analyze and throw some more light on the correlation between equity
and commodity markets during the pre, during and Recovery periods. Further, it also
aims to analyze and determine the causes for such behavior. The study also intends to
investigate the preference of investment in capital and commodity market during crisis
period.

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1.1 LITERATURE REVIEW
1.1.1 Behavior Finance Perspective of Individual Investor
As a result of traditional finance theory appears to play a limited role in understanding
this issues such as :
(1) Why do individual investors trade
(2) How do they perform the task
(3) How do they choose their portfolios to conform their conditions, and
(4) Why do returns vary so quickly even across stocks for reasons other than risk.
In the new arena of behavior finance or so-called behavior economic, we could to
interpret about individual investors behave in their invest choice more completely. Most
of behavioral finance researchers often claimed that the reality results presents no unified
theory unlike traditional finance Theory appears expected utility maximizations using
rational beliefs. Its means those scholars in this field actually postulate whole investors in
financial market are rationales; they cant influenced through any factors only maximum
profit for themselves. Most authors show behavior finance perspective on individual
investor, such as Deaux and Emswiller (1974), Lenney (1977), Maital et al. (1986),
Thaler and Johnson (1990) and Beyer and Bowden (1997). Those authors are to exclaim
that individual investor would demonstrate different risk attitude when facing investment
alternatives. Later instruction in our research, we called risk perception and risk tolerance
of individual investor. Comparing with previously research, current study is to focus on
external factors and psychological factors how to affect investors investment decision a
nd portfolio choice. For instance, Annaert et al. (2005), Wang et al. (2006) indicate the
impact of information asymmetric problem on investor behave, this is another subject in
behavioral finance field. Most of these researches are pay close attention to behavioral
finance, especially in financial products choices (investment) and behave of individual
investor invest related.

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1.1.2 Risk Perception, Risk Tolerance and Portfolio Choice
Financial risk tolerance is defined as the maximum amount of uncertainty that someone is
willing to accept when making a financial decision. Although the importance of assessing
financial risk tolerance is well documented, in practice the assessment process tends to be
very difficult due to the subjective nature of risk taking (the risk of investor willing to
reveal their risk tolerance) and objective factors such as Grable and Joo (1997), Grable
and Lytton (1999), and Grable (2000).
Risk tolerance represents one persons attitude towards taking risk. This indicated is an
important concept that has implications for both financial service providers (asset
management institution or other financial planner) and consumers (investors). For the
latter, risk tolerance is one factor which may determine the appropriate composition of
many assets in a portfolio which is optimal and satisfied investors invest preference in
terms of risk and return relative to the needs of the individual investors Droms, (1987),
Hallahan et al., (2004).
There are some empirical evidence showing the impact of risk perception; risk tolerance
and socio-economic on portfolio choice, for instance, Carducci and Wong (1998), Grable
and Joo (1997), Grable and Lytton (1999), Grable (2000), Hallahan et al., (2003),
Hallahan et al., (2004), Frijns et al., (2008), and Veld and Veld-Merkoulova (2008). In
terms of different risk perception or risk tolerance level, individual investor may show
different reaction base upon their psychology factor and economic situation, which would
lead to heterogeneous portfolio choice for individual investors. For this reason, it is
crucial to recognize and attitudinal how individual investors with different risk
perceptions and risk tolerance make their invest products choice on investment plan, in
particular socio-economic status differentials may make their choice vary and difference.

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1.1.3 Investors Socio-Economic Status and Risk Tolerance
Some researchers have indicated that the validity of widely used demographics as
determinants of risk tolerance is noteworthy as the relationship between socio-economic
status differences including gender, age, income level, net assets, marital status,
educational level and investment decision or portfolio choice. With regard to the financial
risk tolerance literatures, there is much interest in the demographic determinants and risk
attention (involving three risk types: risk aversion, risk moderate and risk seeking) is
particularly focused on age, gender, education level, income level, marital status, the
number of dependents and net assets. Specifically, although debate remains on some
issues, a range of common findings are generally observed. There are five phenomenons
in socio-economic status variables differential and portfolio choice as the following: First,
risk tolerance decreases with age (e.g., Morin and Suarez 1983; Roszkowski, Snelbecker,
and Leimberg 1993). Second, females have a lower preference for risk than males (e.g.,
Roszkowski, Snelbecker, and Leimberg 1993; Grable 2000). Third, risk tolerance
increases with education level (e.g., Roszkowski, Snelbecker, and Leimberg 1993;
Haliassos and Bertaut 1995). Fourth, risk tolerance increases with income level and net
assets (e.g., Cohn et al. 1975; Roszkowski, Snelbecker, and Leimberg 1993; Bernheim,
Skinner, and Weinberg 2001). Fifth, single (i.e., unmarried) investors are more risk
tolerant than married (e.g., Roszkowski, Snelbecker, and Leimberg 1993).
Orthodox models regard commodity prices as steered by both systematic and
idiosyncratic factors. Proponents of commodity investment usually establish their
rationale on diversification benefits rather than expected returns since the theoretical and
empirical evidence for excess returns to commodities has been inconclusive. Further,
volatility and the effect of financialisation continue to be open questions. Broad
macroeconomic factors like; the short interest rate, dividend yield and corporate bond
spread, inter-link commodity futures to stock and bond markets but idiosyncratic factors
create segmentation between commodities and financial assets, as well as between groups
of commodities (Frankel and Rose 2009, Hong and Yogo 2009).
Commodity prices are observed to be volatile and volatility by nature varies with time.
Financialisation and macroeconomic commodity price drivers do affect and alter
volatility and correlation gradually. Accordingly, it is established that there are inter
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-linkages between the commodity and equity markets. Commodity futures transactions
are often considered a high-risk
transaction, as the scheme allows investors to hold large positions with little own capital.
Accordingly, an investor who carries too much risk without enough funds may suffer the
unpleasant fate. However, the attraction for institutional investor is not the type of wager
but the quality of diversification of investment. As such, investors have become aware
that the prices on
commodity markets are not linked with prices on equity markets. Modern Investment
Theory upholds the view that real risk is not the fluctuation in individual assets but only
that part which cannot be annulled by the possession of other assets. Consider an asset, X,
whose price fluctuations are very large. If another asset, Y, provides an offsetting effect,
the actual risk of the asset X is reduced by holding the asset Y. Essentially, previous
studies (Gorton et al., 2007) notice that there is a low correlation between price
fluctuations in equities and commodity futures. One can apparently wonder whether the
sharp upsurge in investor appetite for commodities has had a significant impact on the
pricing of commodity -related financial instruments.

Obviously, one may expect

commodities and equities not to move in sync because of the risk factors that account for
the cross sectional variations in equity returns have historically had no forecasting power
in commodity markets. The reason concerning why the large-scale influx of financial
institutions in commodity markets could be of importance for pricing is if it has led to a
reduced scope for cross-market arbitrage opportunities (Basak and Croitoru, 2006) and, in
the process, has more closely associated the commodity and equity markets.Another
conduit for links between commodity and equity markets is if financial institutions
respond differently from traditional commercial traders to extreme stock market
movements in particular, if sharp downward movements in one market force financial
investors to liquidate positions in commodity markets so as to raise cash for margin calls.
The role of commodity futures is widely accepted as risk diversifiers and inflation
hedgers, and because of their low transaction costs and high potential for alpha
generation through long-short dynamic
trading (Gorton and Rouwenhorst (2006) and Fuertes et al., 2009). These stylized facts
have been very well acknowledged by commodity marketers as these are at the root of
most commodity sales pitches. During the past decade, investors across the globe, have
sought a huge
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exposure to commodity prices by directly purchasing commodities, by taking absolute
positions in commodity futures, or by investing in exchange-traded commodity funds
(ETFs) and in commodity index funds. There has been a remarkable expansion in global
commodity futures transactions in recent years, particularly, the speed of expansion
accelerated from the period
2005 onwards (Heaney,2006 and Zulauf et al., 2006). Commodity investment has often
been thought of as a standalone investment as well as an important diversifier to
traditional stock and bond portfolios. Erb and Harvey (2006) note that the annualized
return of Commodity Market Index (Goldman Sachs Commodity Index (GSCI))
outperformed the Equity Market Index (S&P
500) total return with returns of 12.2%forthe period December 1969 to May 2004. They
also observe that diversification into commodities would have historically improved the
performance of equity markets (Erb and Harvey, 2005). Gorton and Rouwenhorst (2006)
also made further, comparable conclusions.
Commodity markets have indeed attracted significant financial investments and thereby
behaving more like financial markets in terms of the incentives and approaches for
participants. In the recent past, a large amount of trading in commodity markets is carried
out through futures contracts, which are usually cash-settled rather than physically
delivered. This tendency has gone
indeed alongside the proposition by market commentators that speculative activity is the
key driver behind the steady surge. As a result, commodity markets have by far lost their
original function of trade and physical delivery of goods, and have become suitable for
speculative and hedging purposes.
This financialisation of commodity markets has been largely due to the increased
participation of financial investors in derivatives markets. It can be observed that the
rapid growth of commodity derivatives markets since the early 2000 is associated with a
host of factors like; dot-com bubble-burst, low interest environments, sustained
depreciation in the US dollar ,in conjunction with the entry of new players like;
investment funds, mutual funds, pension and hedge funds and sovereign wealth funds
apart from the macroeconomic drivers like the demand and supply fundamentals that have
contributed to the volatility. Further, industrialization in China, India, and emerging Asia
that accelerated the consumption of fuels, metals, and food has also played its

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role in the escalation of commodity markets(Helbling et al., 2008). Further, it is also
argued that the flight of funds from equity and bonds markets was caused mainly due to
the monetary easing in the advent of financial crisis in the summer 2007 in US.
Undoubtedly, financial activity in the commodity markets has gained widespread
momentum since 2000 putting the volumes of traded derivatives at 20 to 30 times the
physical production of many of the commodities (Redrado et al., 2008; Domanski and
Heath, 2007). In view of this, we argue that increased financialization of commodity
markets of late has increased their exposure to macroeconomic and financial shocks
compared to the earlier cycles.

1.1.4Integration of Capital, Commodity and Currency Markets: A Study on

Volatility Spillover: Suhail Palakkod
In this study an effort has been made to analyse the integration and interrelationship
among the capital market, currency market and commodity market in India through the
volatility spillover frame work. The study found out that the volatility spillover from
currency markets and commodity markets to capital markets. Likewise the volatility
spillover from capital market to currency markets and there is no spillover from
commodity market to currency markets. In case of commodity market there is no
evidence of volatility spillover.

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1.1.5 Interlinkages between Equity, Currency, Precious Metals and Oil Markets: An
Emphasis on Emerging Markets: Lucia Morales
This thesis examines the interlinkages between equity, currency, precious metals and oil
markets. The author of this thesis considered it appropriate to implement such an analysis
due to the fact that the relationships between financial markets, currency markets and the
above-mentioned commodities markets have not been analyzed to the extent that it is
proposed in the present thesis. Using daily data, the study focuses on the investigation of
the relationships that exist between these financial and commodity markets for a time
period that spans from 1995 to 2008; different time periods and sub-samples are also
analysed, in order to obtain an in-depth understanding of the interlinkages between these
markets. The main findings show that exchange rates and stock prices seem to be
independent. Overall, there is no evidence of these two variables moving together either
in the long-run or short-run. The results show evidence of a unidirectional causality
relationship running from stock returns to exchange rates in some of the countries under
analysis, with weak evidence of a causal relationship running from exchange rates to
stock returns. In relation to the volatility analysis, there is some commonality regarding
the behaviour of the variables, with a unidirectional spillover effect between the markets,
which is found from the stock returns equation to the exchange rates equation. The lack of
significant spillovers from exchange rate changes to stock returns found here for some
countries across a number of exchange rates is consistent with existing research in this
area. The analysis of precious metals markets shows that they do not seem to be strongly
affected by movements in equity markets; on the other hand, oil prices tend to be
positively correlated with precious metals markets, the latter having an important
influence on them.

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1.1.6Frankel, J.A., and Rose, A.K. (2009), Determinants of Agricultural and
Mineral Commodity Prices, unpublished manuscript, Harvard University.
This paper presents a theory that allows a role for macroeconomic determinants of real
commodity prices. Broad macroeconomic factors like; the short interest rate, dividend
yield and corporate bond spread, inter-link commodity futures to stock and bond markets
but idiosyncratic factors create segmentation between commodities and financial assets,
as well as between groups of commodities.
1.1.7Hong, H., and Yogo, M. (2009), Digging into Commodities, Working Paper,
Department of Economics, Princeton University, Princeton, NJ
This paper investigates the determinants of aggregate commodity returns and establishes
the following findings.
(1) Common predictors of bond and stock returns, such as the short rate and the yield
spread, also predict commodity returns. A high yield spread predicts low commodity
returns, consistent with commodities being a hedge for market fluctuations.
(2) Even controlling for these common predictors, a low aggregate basis (the ratio of
futures to spot price averaged across commodities) predicts high returns on being long
commodity futures, consistent with the theory of backwardation. A low aggregate basis
also predicts low spot-price growth, consistent with the theory of storage. The component
of aggregate basis that is orthogonal to these common predictors does not predict bond or
stock returns, suggesting that aggregate basis is a predictor that is local to the commodity
market.
(3) Aggregate basis explains as much of the variation in expected commodity returns as
the common predictors.
(4) Recent evidence suggests that aggregate basis has become a more important
determinant of commodity returns relative to the common predictors.

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1.1.8 Gorton, G., and K. Rouwenhorst (2006), Facts and Fantasies about
Commodity Futures,
This paper constructs an equally-weighted index of commodity futures monthly returns
over the period between July of 1959 and March of 2004 in order to study simple
properties of commodity futures as an asset class. Fully-collateralized commodity futures
have historically offered the same return and Sharpe ratio as equities. While the risk
premium on commodity futures is essentially the same as equities, commodity futures
returns are negatively correlated with equity returns and bond returns. The negative
correlation between commodity futures and the other asset classes is due, in significant
part, to different behavior over the business cycle. In addition, commodity futures are
positively correlated with inflation, unexpected inflation, and changes in expected
inflation.

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1.2 RESEARCH STRATEGY
1.2.1 OBJECTIVES OF THE STUDY
1. To study the correlation between the commodity markets and equity markets
during crisis period.
2. To analyze and determine the customer awareness and preferences of investment
in capital and commodity market during financial crisis.
3. To analyze the impact of financial crisis on investment in financial securities and
commodity market

1.2.2 HYPOTHESIS
H0 = There is no correlation between the commodity markets and equity markets.
H1= There is a correlation between the commodity markets and equity.

1.2.3 STUDY PERIOD

Daily data sourced from the aforesaid exchanges has been employed for the respective
analyses. In order to study the movements of the markets during the pre-recession,
recession and Recovery periods, we adopt the comparable time horizon i.e., for prerecession period we consider the period from September 2007 to August 2008, for
recession period we consider September 2008 to August 2009 and for Recovery period
September 2009 to August 2010 is considered.

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1.2.4 Research Methodology
Our hypothesis is that there exists a correlation between the commodity markets and
equity markets in view of the inter-linkages owing to various factors. Therefore, we study
the relationship between commodity markets and equity markets between varying periods
and compare the trend in the developed countries. To understand the developed markets
we have considered the popular global markets . The study is structured into three phases:
(i) Pre-Recession period
(ii) Recession period and
(iii) Recovery period.
In all these phases, the correlation between commodity markets and capital market has
been studied.

1.2.5 TYPE OF STUDY

Type of study done to complete the project is descriptive cum correlational study.
1. Descriptive research is used to describe characteristics of a population or
phenomenon being studied. It does not answer questions about how/when/why the
characteristics occurred.
2. A correlational study determines whether or not two variables are correlated. This
means to study whether an increase or decrease in one variable corresponds to an
increase or decrease in the other variable.

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1.2.6 RESEARCH DESIGN:
Research Design is based on correlational research, on the other hand, the Researcher has
to use facts or information already available, and analyze these to make a critical
evaluation of the topic.

1.2.7 SOURCES OF THE DATA:

Primary Data:
1.The primary data is collected using questionnaire where the objective was to know the
awareness and preferences of investment in capital and commodity market.
2.The primary data is also collected through discussions with various investors in
financial securities and commodity market
Secondary Data:
The main sources of data are collected through website, various Publication books,
magazines, newspaper and reports prepared by research Scholars .

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1.2.8 DATA COLLECTION AND ANALYSIS
The data collected is analyzed by using MS-EXCEL. In the process of analysis chi-square
test is used and even correlation between the global commodity index Amex Gold Bugs
and global capital market Nasdaq is done using excel to understand the correlation
between the two global markets. For Commodity markets, to consider the global scenario
we use total (unlevered) returns on the second most widely used investable benchmark,
Amex Gold BUGS (Basket of Unhedged Gold Stocks) Index. On the same lines, for
Capital markets, to study the global scenario we use, Nasdaq Composite model captures
the analysis of AMEX Gold BUGS and NASDAQ to understand the movement as a
commodity in association with equity markets to understand the global market

1.2.9 LIMITATIONS OF THE STUDY

1. Understanding the nature of the risk is not adequate unless the investor or analyst
is capable of expressing it in some quantitative terms. Expressing the risk of a
stock in quantitative terms makes it comparable with other stocks.
2. Measurement cannot be assured of cent percent accuracy because risk is caused by
numerous factors such as social, political, economic and managerial efficiency.
3. Time was a limiting factor.
4. Only those investors who deal in capital markets are considered.

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