COVID-19 pandemic and economic policy uncertainty regimes affect commodity market volatility

Abstract

This paper investigates the switching effect of COVID-19 pandemic and economic policy uncertainty on commodity prices. We employ Markov regime-switching dynamic model to explore price regime dynamics of eight widely traded commodities namely oil, natural gas, corn, soybeans, silver, gold, copper, and steel. We fit two Markov switching regimes to allow parameters to respond to both low and high volatilities. The empirical evidence shows oil, natural gas, corn, soybean, silver, gold, copper, and steel returns adjust to shocks in COVID-19 outcomes and economic policy uncertainty at varying degrees––in both low volatility and high volatility regimes. In contrast, oil and natural gas do not respond to changes in COVID-19 deaths in both regimes. The findings show most commodities are responsive to historical price in terms of demand and supply in both volatility regimes. Our findings further show a high probability that commodity prices will remain in low volatility regime than in high volatility regime––owing to COVID-19-attributed market uncertainties. These findings are useful to both investors and policymakers––as precious metals and agricultural commodities show less negative response to exogenous variables. Thus, investors and portfolio managers could use precious metals, viz. Gold for short-term cover against systematic risks in the market during the period of global pandemic.

The sum of all SCARES COVID-19 sentiment and asset return

“…Prior COVID-19 literatures use these statistics to investigate the impact of COVID-19 (e.g. Just & Echaust, 2020 ; Ahmed & Sarkodie, 2021 ; Ashraf, 2021 ). Data are collected from WHO and similar to that of other non-market data series, I remove non-trading days’ COVID cases and deaths to match with market data.…”

“…In financial modeling, it has become one of the popular methods because of this model’s utilities in capturing sudden shocks that persist after variation in several periods (e.g. Ang & Timmermann, 2012 ; Ahmed & Sarkodie, 2021 ). I apply following model to study the regime switching impact, where is the dependent variable, which consists of S&P500, EMVID, TEU, ADS, EPU, VIX, and ILLIQ in different model sets, is SCARES index, denotes the regimes; either 1 or 2 at time t , and is the stochastic error term.…”

“… Shen et al, 2020 ) and industry and commodity market (e.g. Aloui et al, 2020 ; Ahmed & Sarkodie, 2021 ; Yakubu & Sarkodie, 2021 ; Kanno, 2021 ). In a different aspect, I investigate the impact of COVID-19 sentiment on factor returns i.e.…”

Modeling the impact of the COVID‐19 outbreak on environment, health sector and energy market

“…The augmented Dickey–Fuller (ADF) unit root test, as used by Adedeji et al ( 2021 ); Ahmed and Sarkodie ( 2021 ); Albulescu ( 2020 ); Atri et al ( 2021 ); Bourghelle et al ( 2021 ); Maneejuk et al ( 2021 ) will be employed to verify the non‐stationary of our variables. In addition, in line with Czech and Wielechowski ( 2021 ), the Kwiatkowski–Phillips–Schmidt–Shin (KPSS) test will be applied.…”

Fundamentals vs. Financialization during Extreme Events: From Backwardation to Contango, a Copper Market Analysis during the COVID-19 Pandemic

“…Commodities market prices reached their lowest level in decades, such as, for example, the crude oil and natural gas markets [1]. Other commodities traded in futures exchanges, such as soft commodities and metals, also reacted sharply to this global crisis, with a vast shift in prices [2], and the historical refuges of these stock markets also being affected [3]. Copper, in particular, underwent a price decrease of almost 25%, from EUR 6200 at the beginning of 2020 to EUR 4627 per metric ton only 3 months after, with a lack of interest in Mathematics 2022, 10, 559 2 of 23 the buying market and with most of the players trying to liquidate their long-held positions in official warehouses.…”