The Dynamic Correlation Between Policy Uncertainty and Commodity Markets : A Wavelet Based Analysis

This research investigates the effect of the US economic policy uncertainty (EPU) on the price dynamics of agricultural, energy and metal over the period 1985:01–2017:12 using wavelet coherence analysis. The results demonstrate that the price movement among the commodities and EPU indices changed through time and frequencies, showing a relatively strong co-movement at low frequencies and weak co-movement of high frequencies. Our empirical results also reveal that changes in the US economic policy uncertainty have adverse effect on the dynamic returns of agricultural, energy and metal commodities. We also observe that upsurge in policy uncertainty reduces the prices of the commodities significantly and this result is persistent and stronger during risky volatility periods