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.
Highlights
The World Health Organization declared COVID-19 as global emer gency in February 2020, and on March 11, declared the virus as global pandemic when it migrated to 110 countries with 118,000 reported cases (WHO, 2020)
The empirical ev idence 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
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
Summary
The World Health Organization declared COVID-19 as global emer gency in February 2020, and on March 11, declared the virus as global pandemic when it migrated to 110 countries with 118,000 reported cases (WHO, 2020). The first community infection of COVID-19 was recorded on February 26, 2020 and as of April 11, the U.S recorded the highest death toll of 2108 in a single day surpassing Italy (JHUM, 2020) This necessitated the suspension of government activities and implementation of strict lockdown measures including social distancing, travel restrictions, stay at home, and other measures across the United States (Sarkodie and Owusu, 2020a,b). This had a drastic impact on the world-leading economies, such as the United States, China, U.K, Germany, Canada, Japan, and France (Yakubu and Sarkodie, 2021)
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