Time-frequency co-movements between commodities and economic policy uncertainty across different crises

Paper: arXiv 2304.05517

Authors: M. Belén Arouxet, Aurelio F. Bariviera, Verónica Pastor, Victoria Vampa

Abstract

Commodity futures constitute an attractive asset class for portfolio managers. Propelled by their low correlation with other assets, commodities begin gaining popularity among investors, as they allow to capture diversification benefits. After more than two decades of active investing experience, this paper examines the time and frequency of spillovers between Economic Policy Uncertainty (Davis, 2016) and a broad set of commodities. The period under examination goes from December 1997 until April 2022, covering political, economic, and even health crises. We apply a wavelet coherence analysis between time series, in order to shed light on the time-frequency comovements and lead-lag relationships. This research finds a distinct impact on the commodities, depending on the nature of the crisis. In particular, during the global financial crisis and the Covid-19 crisis, comovements are stronger in most commodities.

Complexity vs Empirical Score

• Math Complexity: 5.5/10
• Empirical Rigor: 6.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper uses standard wavelet coherence methods to analyze time-frequency relationships between commodity futures and economic policy uncertainty across multiple crisis periods. While the empirical coverage over a 25-year sample is solid, the methodology is a straightforward application of established wavelet techniques rather than a novel theoretical contribution.

Research Flowchart

  flowchart TD
    A["Research Goal:<br>Analyze Time-Frequency Spillovers between EPU & Commodities Across Crises"] --> B["Data Inputs (1997-2022):<br>Global EPU Index & Commodity Futures Time Series"]
    B --> C["Methodology:<br>Wavelet Coherence Analysis"]
    C --> D["Computational Processes:<br>Assess Time-Frequency Co-movements & Lead-Lag Relationships"]
    D --> E["Key Findings:<br>Distinct Crisis Impacts & Stronger Co-movements During GFC & COVID-19"]