Impacts of geopolitical risk and economic policy uncertainty on metal futures price volatility: Evidence from China

Abstract

In recent periods, the global metal trade has faced heightened uncertainty due to evolving geopolitical events and the dynamism of economic policies. The present study offers a detailed and encompassing investigation into the impacts of geopolitical risk (GPR) and economic policy uncertainty (EPU) on price volatility in the metal futures market. Notably, existing literature in this domain remains sparse. As a response, our analysis delves into the time-varying effects, volatility spillover dynamics, and heterogeneity across various countries and regions. Methodologically, we employ the GARCH-MIDAS framework, with a specific focus on the metal futures market in China. The research yields the following key findings: Firstly, aluminum futures prices exhibit sensitivity solely to geopolitical risk (GPR), whereas fluctuations in copper and zinc futures prices are influenced by both GPR and economic policy uncertainty (EPU). Furthermore, it is observed that GPR and EPU exert contrasting effects on price dynamics. Secondly, the impact of GPR and EPU on price fluctuations exhibits temporal variability. This influence gradually intensifies over time, culminating in a notable and sustained effect at a specific juncture post-2020. Thirdly, with the exception of copper futures, it is evident that GPR and EPU exert the most substantial influence on price fluctuations in metal resources exporting nations and countries with substantial demand for metal products within the context of China. The outcomes of this study carry significant policy implications. The observed time-varying effects may be construed as a reflection of the maturation process of China's metal futures market. Furthermore, the detected regional heterogeneity underscores the necessity for investors to differentially weigh countries when assessing the influence of geopolitical risk (GPR) and economic policy uncertainty (EPU) on China's metal futures market.