The spillover effect between the expected interest rate and commodity prices

Abstract

Subject. This article deals with the spillover effects between the expected interest rate and commodity prices. Objectives. The article aims to determine the extent to which the expected interest rate affects volatility of commodity prices. Methods. For the study, I used certain methods proposed by F.X. Diebold and K. Yilmaz. The study time frame covers the period from 1998 to 2020 that allows to view dynamic relationship between the expected interest rate and commodity prices. Results. The analysis shows that spillover effects account for 10 to 40% of volatility. Interest rate expectations shock are a source of volatility that spills over to other markets. At the same time, commodities are net recipients of volatility, suggesting that some of the volatility in commodity prices is due to changes in the expectations of future interest rate. In addition, there is a heterogeneous effect on various groups of goods. Relevance. The results obtained provide an additional factor that managers and investors can pay attention to when forming their portfolios.