The Dynamic Interrelations of Commodity Futures Return

The Role of Economic Policy Uncertainty and Geopolitical Risk

Abstract

We examine the dynamic interrelations of commodity futures returns and the role of economic policy uncertainty and geopolitical risk. We consider the daily near-month contract futures price of nine commodities covering from 4th January 2012 to 29th September 2023. We employ wavelet power spectrum, wavelet coherence, and wavelet-based Granger causality tests to verify the dynamic interrelations and causality relationship of commodity futures return and the role of global risk factors such as economic policy uncertainty and geopolitical risk at different time horizons. The results reveal a strong interrelation between commodity futures return and economic policy uncertainty (EPU) except for silver and mentha oil. However, the geopolitical risk (GPR) shows a weak relationship with precious metal, base metals, and energy commodities such as gold, lead, zinc, crude oil, and natural gas across all-time frequencies. Next, the Wavelet-based Granger causality test provides strong evidence that commodities futures return cause the EPU in all the time horizons. On the other hand, the geopolitical risk provides significant evidence that commodities futures return causes GPR in all time horizons. The study provides significant policy implications to the various stakeholders of the commodity derivatives market participants such as policymakers, speculators, traders, hedgers, investors and other stakeholders.