The inflation-hedging performance of industrial metals in the world's most industrialized countries

Abstract

Can inflation risks be hedged by industrial metals? This is the poser that this study intends to address. We examine this possibility for seven (7) globally traded industrial metals in twenty (20) most industrialized countries of the world. The depth of industrialization process of these countries and the increasing level of financialization of commodity markets motivate us to consider the hedging potential of these industrial metals. Summarily, we find that each of the industrial metals can hedge inflation risks in at least one country. When asymmetries are accounted for, the inflation-hedging ability of the metals improves. We also note that on country-specific basis, the hedging performance of the metals is stronger after the 2008 financial crisis. However, the average hedging performance based on the panel data analysis is susceptible to financial shocks. Lastly, the inflation-based predictive model offers a better forecast performance for the commodity returns in most cases than the historical average model. Important investment and policy decisions can be made respectively by commodity investors and policy makers based on the findings established in this study.