Commodity returns co-movement, uncertainty shocks, and the US dollar exchange rate

Wenting Liao, Jun Ma and Chengsi Zhang

Journal of International Money and Finance, 2024, vol. 143, issue C

Abstract: This study examines the time-varying effects of uncertainty shocks identified using the external instrument method on the broad-based movement of commodity returns since the early 1990s. We employ a vector autoregression augmented dynamic factor model with time-varying parameters and stochastic volatility to extract a common factor from 43 commodity returns. We find that uncertainty shocks reduce commodity returns across the board through this common factor and that their effects vary significantly over time, with a tendency to grow much stronger during recessions. Furthermore, uncertainty shocks often lead to dollar appreciation, so they can potentially account for the seemingly negative correlation between commodity returns and strength of the US dollar.

Keywords: Commodity return; Exchange rate; Uncertainty shock (search for similar items in EconPapers)
JEL-codes: C32 E32 F31 Q02 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:143:y:2024:i:c:s0261560624000433

DOI: 10.1016/j.jimonfin.2024.103056

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