Are commodity futures a hedge against inflation? A Markov-switching approach

Chunbo Liu, Xuan Zhang and Zhiping Zhou

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: This study examines the inflation hedging ability of various commodity futures using Markov-switching vector error correction models (MS-VECM). We find that total commodity futures fail to provide a hedge against inflation over the sample period between January 1983 and December 2021. However, industrial metals and precious metals are able to hedge against inflation. Other sub-indexes, including energy, agriculture, and livestock, do not have a significant inflation hedging ability. The inflation hedging capacity of industrial metals exhibits substantial variation over time, with most of the inflation hedging power occurring during the relatively longer and more common regimes covering the Great Moderation, the post-subprime crisis, and the periods after the outbreak of the COVID-19 pandemic. We further evaluate the inflation hedge ability of commodity futures by including stocks and bonds in the model. Our results suggest that industrial metals are more reliable inflation hedges.

Keywords: Inflation hedge; Commodity futures; Markov-switching models; Industrial metals (search for similar items in EconPapers)
JEL-codes: C58 E31 G11 G13 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s105752192300008x

DOI: 10.1016/j.irfa.2023.102492

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