Consumption- and speculation-led change in demand for oil and the response of base metals: A Markov-switching approach

Abstract

We examine how base metal returns respond to various oil shocks applying Markov-switching models. We find that both consumption-led and speculation-led increase in demand for oil increase metal returns while an increase in oil supply decreases metal returns. However, the effects of oil supply shocks and speculation-led oil demand shocks are statistically significant mostly in the high volatility regimes indicating a stronger link between oil and base metals in the volatile markets. Our novel finding of regime-dependent relation between oil and metal markets has important implications for both investors and policy makers.