Extreme risk spillover effect and dynamic linkages between uncertainty and commodity markets: A comparison between China and America

Houjian Li, Yanjiao Li and Lili Guo

Resources Policy, 2023, vol. 85, issue PA

Abstract: This study aims to assess the extreme risk spillover effect and dynamic linkages between uncertainty and commodity markets. We consider geopolitical risk, economic policy uncertainty, and climate policy uncertainty to measure uncertainty shocks and compare two common commodity markets spanning China and America. Then, the quantile-based TVP-VAR method is used to conduct an empirical study using monthly data from May 2008 to August 2021. Our findings demonstrate that, first, the interaction between uncertainty and commodity markets is particularly vulnerable to extreme shocks, with greater lower quantile spillover effects than those at the upper quantile. Second, there is a time-varying variation in the spillover effects between uncertainty and commodity markets, and the spillovers are vulnerable to shocks from a significant crisis. Third, the impulse response of commodity price indexes to the uncertainty indexes is time-varying, with shocks fluctuating sharply in the short run and stabilizing over the long term. Finally, compared to American commodity markets, Chinese commodity markets exhibit greater complexity and higher volatility in their initial responses to uncertainty shocks. In most cases, the US commodity market is a transmitter of risks, while the Chinese commodity market often receives risks, with uncertainty shocks acting as both the transmitter and receiver. These intriguing findings can serve as a guide to prevent market risks and optimize investment decisions.

Keywords: Uncertainty shocks; Commodity markets; Dynamic relationship; China; United States (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:85:y:2023:i:pa:s0301420723005500

DOI: 10.1016/j.resourpol.2023.103839

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