The impact of uncertainty shocks on the volatility of commodity prices

In this paper, we empirically examine the impact of uncertainty shocks on the volatility of commodity prices. Using several alternative measures of economic uncertainty for the U.S., we estimate their effects on commodity price volatility through VAR analysis. We find that the latent uncertainty shocks have the most significant impact on commodity price volatility when compared to observable measures of economic uncertainty. In specific, our results show that the unobservable economic uncertainty measures of Jurado et al. (2015) have a significant and long-lasting positive effect on the volatility of commodity prices. Our findings indicate that a positive shock in unobservable macroeconomic and financial uncertainty leads to a persistent increase in the volatility of the broad commodity market index and of individual commodity prices, with the macroeconomic effect being more significant. Finally, we show that the impact is stronger in energy commodities compared to agricultural and metals markets. (C) 2018 Elsevier Ltd. All rights reserved.