Investing in Commodities in Times of Uncertainty and Lax Monetary Policy

Abstract

This chapter presents empirical evidence showing the impact of economic uncertainty and monetary policy on the volatility of commodity futures markets. The findings are in line with those of the relevant literature according to which rising uncertainty predicts rising volatility in commodity markets. The author shows that the unobservable economic uncertainty measures of Jurado et al. (2015) have a significant and long-lasting positive impact on the volatility of commodity prices. Hence, the OLS regression results show that commodity markets are significantly affected by the rising degree of unpredictability in the macroeconomy, while they are relatively immune to observable macroeconomic fluctuations. The expansionary monetary policy is followed by rising volatility in agricultural and energy markets, while it has much smaller effect on the volatility of metals markets. Financialization in commodity markets has increased the dynamic linkages between monetary policy shocks and commodity price volatility.