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Political Uncertainty and Commodity Markets

Last Updated on 10 February, 2024 by Abrahamtolle

The paper “Political Uncertainty and Commodity Markets” provides a comprehensive study of the impact of political uncertainty on commodity markets, integrating theoretical analysis with empirical findings.

Delving into the distinctive dimensions of political uncertainty from demand and supply perspectives, the research uncovers intriguing patterns preceding U.S. presidential elections, revealing a substantial decline in commodity prices and inventories, accompanied by a noteworthy increase in convenience yields.

Conversely, disparate effects are observed in major commodity-producing countries, underscoring the asymmetric influence of political uncertainty on the supply side. Notably, the study also investigates risk premiums, shedding light on their stability before elections.

Additionally, the research challenges the conventional wisdom, revealing that gold may not be an effective hedge against political uncertainty. This nuanced exploration offers invaluable insights into the intricate interplay between political uncertainty and commodity markets, enriching our understanding of these dynamic economic systems.

Abstract Of Paper

We study the effects of political uncertainty on commodity markets from both theoretical and empirical perspectives. Consistent with our theoretical predictions, commodity prices and inventories decline by 6.6% and 5.7%, respectively, and convenience yields increase by 1.9% in the quarter leading up to U.S. presidential elections, our proxy for political uncertainty on the demand side. Opposite results are obtained for political uncertainty on the supply side using national elections in major commodity-producing countries. We do not observe significant changes in risk premiums before elections. Furthermore, we show that gold is not an effective hedge against political uncertainty.

Original paper – Download PDF

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Author

Kewei Hou
Ohio State University (OSU) – Department of Finance

Ke Tang
Institute of Economics, School of Social Sciences, Tsinghua University

Bohui Zhang
The Chinese University of Hong Kong, Shenzhen

Conclusion

In conclusion, the study “Political Uncertainty and Commodity Markets” furnishes a nuanced understanding of the multifaceted influence of political uncertainty on commodity markets.

The empirical evidence aligns with theoretical predictions, unveiling significant declines in commodity prices and inventories, alongside an increase in convenience yields leading up to U.S. presidential elections, indicative of the impact on the demand side.

Conversely, the study highlights divergent outcomes for political uncertainty on the supply side in major commodity-producing countries. Furthermore, the investigation of risk premiums demonstrates their resilience before elections.

Notably, the research challenges prevailing beliefs by revealing that gold may not serve as an effective hedge against political uncertainty.

This comprehensive exploration enriches our comprehension of the intricate interplay between political uncertainty and commodity markets, offering valuable insights for both academics and practitioners navigating these economic landscapes.

Related Reading:

Momentum Strategies in Commodity Futures Markets

Tactical Asset Allocation to Gold

FAQ

Q1: What is the main focus of the research paper “Political Uncertainty and Commodity Markets”?

A1: The main focus of the research paper is to study the effects of political uncertainty on commodity markets. The study explores this impact from both theoretical and empirical perspectives, considering distinctive dimensions of political uncertainty from both demand and supply perspectives.

Q2: What does the study find regarding the impact of political uncertainty on commodity markets leading up to U.S. presidential elections?

A2: The study finds that leading up to U.S. presidential elections, which serve as a proxy for political uncertainty on the demand side, commodity prices and inventories decline by 6.6% and 5.7%, respectively. Additionally, convenience yields increase by 1.9%. These findings suggest significant effects on the demand side of commodity markets.

Q3: How does political uncertainty affect commodity markets in major commodity-producing countries on the supply side?

A3: The study reveals opposite effects on the supply side in major commodity-producing countries. The impact of political uncertainty on the supply side differs from the effects observed on the demand side, indicating an asymmetric influence on commodity markets based on the perspective of political uncertainty.

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