The time-varying effects of financial and geopolitical uncertainties on commodity market dynamics: A TVP-SVAR-SV analysis

We explore the time-varying effects of financial and geopolitical uncertainties on commodity markets using a time-varying parameter structural vector autoregression with stochastic volatility (TVP-SVAR-SV) model. Our results indicate that the effects of geopolitical and financial uncertainties on commodity dynamics are concentrated in the short-term, and commodity volatility is more affected than returns. The volatility of commodity futures responds differently to different types of financial uncertainty shocks, and the uncertainty shocks caused by financial stress have produced relatively large effects, especially since the global financial crisis. Furthermore, our findings contradict traditional wisdom, as we observe that the uncertainty shocks caused by financial liquidity lead to increased commodity returns only in the short term. There are obvious heterogeneity responses of commodity futures in different sectors to uncertainty shocks. Energy and industrial metals are more affected than other commodities. Our findings are an important reference for decision makers and investors.

Automated summary

The study reveals that the effects of financial and geopolitical uncertainties on commodity markets are concentrated in the short term, with volatility being more impacted than returns. Different types of financial uncertainty shocks have varying effects on commodity futures volatility, with financial stress shocks having relatively large impacts, especially post-global financial crisis. Furthermore, shocks caused by financial liquidity increase commodity returns only in the short term.