Abstract
We use a Markov-switching vector autoregressive model to examine the impact of financial stress on the volatility of commodity prices, including energy volatility. An increase in financial stress leads to a persistent increase in the volatility of the commodity index and of individual commodity prices. We confirm the existence of three volatility regimes, with the volatility of the commodity index and of individual commodity prices in the high volatility regime being more than 25 times larger than that in other regimes. A financial stress shock that arrives during a highly volatile period has more destabilizing and persistent effects than when the shock arrives during a low volatility period. The impact on energy volatility in the high volatility regime is over 60% larger than that on the volatility of the commodity index. The high volatility regime is short-lived and reflects major economic events as well as the outbreak of the COVID-19 pandemic.
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