Impacts of weather conditions on the US commodity markets systemic interdependence across multi-timescales

Abstract

This study analyses the role of weather conditions in driving the interdependence of the US commodities system comprising energy, agricultural, and metal markets from January 2000 to October 2021. By measuring the commodity markets systemic interdependence through dynamic equicorrelation (DECO), total returns spillover (TRS), upside and downside tail risk spillover (UTRS/DTRS), we investigate the co-vary dynamics between weather conditions and interdependence of commodity system in time-frequency domains. We discover that low temperature level plays a significant role in leading the commodities DECO at 32–64 months time scale. It is shown that high temperature level, global horizontal irradiance, and wind speed acts as an important part in driving TRS at around 64-month time scale. We also find that high temperature level and global warming conditions have a negative leading influence on UTRS at 32–64 months time scale whilst cloud coverage, precipitation and runoff have a positive leading impact on the UTRS at the same time scale. Moreover, temperature is found to lead the change of DTRS at around 64-month time scale persistently throughout the sample period. Through incorporating heterogeneous investment horizons, our findings provide practical implications for commodity investors in adapting to climate change.