Time-frequency co-movements between commodities and global economic policy uncertainty across different crises

Area of Science:

• Finance
• Economics
• Econometrics

Background:

• Commodity futures offer diversification benefits due to low correlation with other assets.
• Investor interest in commodities is growing, necessitating a deeper understanding of market dynamics.
• Economic policy uncertainty (EPU) is a critical factor influencing financial markets.

Purpose of the Study:

• To examine time and frequency spillovers between EPU and diverse commodity groups (metals, food, energy).
• To analyze commodity market responses to various crises from 1997 to 2022.
• To provide insights into lead-lag relationships and co-movements within commodity markets.

Main Methods:

• Utilized Cross Wavelet Transform (XWT) and Wavelet Coherence (WTC) analysis.
• Applied wavelet analysis for detailed insights in time and frequency domains.
• Analyzed non-stationary and non-linear financial time series data.

Main Results:

• Crises do not uniformly impact all commodities; impacts are heterogeneous.
• Co-movements among commodities intensified during the global financial crisis and COVID-19 pandemic.
• Identified diverse underlying dynamics within the commodity asset class.

Conclusions:

• The study provides valuable insights for policymakers, investors, and fund managers.
• Understanding crisis-specific commodity responses is crucial for portfolio management.
• Wavelet analysis offers a robust methodology for analyzing complex financial time series.