The effect of macroeconomic regimes, uncertainty, and COVID-19 outcomes on commodity price volatility: implications for green economic recovery

Abstract

COVID-19 adversely affected all market mechanisms, shocked economies, halted business operations, and disrupted supply chains. This study examines macroeconomic instability by assessing the commodities market in highly traded regimes using descriptive statistical analysis, the Economic Policy Uncertainty (EPU) Index, and Markov Regime Swapping (MRS) for data covering February 26 to November 30, 2020. The findings indicate that most commodities respond to stock values in both high and low-volatility regimes of supply and demand. Additionally, commodity prices are still in a low volatility regime due to COVID-19-related market uncertainty. The returns for oil, corn, gold, copper, natural gas, silver, and soybeans adapt to low macroeconomic uncertainty and variable rankings for COVID-19. In contrast, changes in COVID-19 deaths had no impact on natural gas or oil under any regime. As agricultural commodities and valuable metals have less negative feedback to exogenous variables than any other commodities, this model is useful for regulators and stockholders. The results suggest that in a global pandemic, portfolio managers and other stakeholders should use priceless metals like gold as a short-term hedge against systemic market risks to achieve macroeconomic stability and facilitate a rapid recovery in the green economy.