Shock transmission between climate policy uncertainty, financial stress indicators, oil price uncertainty and industrial metal volatility: Identifying moderators, hedgers and shock transmitters

Muhammad Shahbaz, Umaid A. Sheikh, Mosab I. Tabash and Zhilun Jiao

Energy Economics, 2024, vol. 136, issue C

Abstract: This research initially examines the shock transmission from news-related Climate Policy Uncertainty (CPU), the CBOE crude oil volatility index as a proxy for Oil Price Uncertainty (OPU), and global Financial Stress Indicators (FSI) such as “Credit, ““Equity-Valuation, ““Funding,” “Safe-Assets,” and “Volatility,” towards the conditional volatility of global steel, iron ore, and aluminum prices using monthly time series data spanning from January 2004 to September 2023. The study employs novel “Extended Joint” and “Frequency” domain Time-Varying Parameter Vector Auto-Regression (TVP-VAR) models. Secondly, hedge ratios and optimal portfolio weights are computed utilizing the DCC-GARCH-t copulas approach to investigate the potential of offsetting long-term volatility in one industrial metal through short-term positioning in another. Thirdly, this research delves into the moderating influence of CPU, OPU, and FSI on overall, short-term, and long-term volatility interconnectedness among industrial metals. Overall, the findings suggest that OPU and CPU transmit higher shocks towards aluminum and steel for both short- and long-term investment periods. However, shocks transmitted in the short term from OPU, CPU, and FSI are higher in intensity compared to the long-term period. In both short- and long-term investment periods, FSI such as “Equity Valuation,” “Funding” constraints, and transitions towards “Safer Assets” transmit higher shocks towards the conditional volatility in industrial metals. The hedge ratios and optimal portfolio selection strategies demonstrate that short-term positioning in steel provides efficient hedging against long-term volatility in aluminum and iron ore. Finally, the positive moderating impact of OPU on volatility interconnectedness between industrial metals has several practical implications for stakeholders.

Keywords: Industrial metals; Climate policy uncertainty; Financial stress indicators; Oil Price uncertainty; TYP-VAR; Time and frequency domain connectedness; DCC-GARCH-t copula; Hedge ratios; Optimal portfolio weight selection strategy (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:136:y:2024:i:c:s0140988324004407

DOI: 10.1016/j.eneco.2024.107732

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