Time-frequency co-movements between commodities and economic policy uncertainty across different crises

Abstract: Commodity futures constitute an attractive asset class for portfolio managers. Propelled by their low correlation with other assets, commodities begin gaining popularity among investors, as they allow to capture diversification benefits. After more than two decades of active investing experience, this paper examines the time and frequency of spillovers between Economic Policy Uncertainty (Davis, 2016) and a broad set of commodities. The period under examination goes from December 1997 until April 2022, covering political, economic, and even health crises. We apply a wavelet coherence analysis between time series, in order to shed light on the time-frequency comovements and lead-lag relationships. This research finds a distinct impact on the commodities, depending on the nature of the crisis. In particular, during the global financial crisis and the Covid-19 crisis, comovements are stronger in most commodities.