Multiscale analysis of the complex interaction between uncertainty and the international commodity market

Abstract

Purpose

This study aims to systematically reveal the complex interaction between uncertainty and the international commodity market (CRB).

Design/methodology/approach

A composite uncertainty index and five categorical uncertainty indices, together with wavelet analysis and detrended cross-correlation analysis, were used. First, in the time-frequency domain, the coherency and lead-lag relationship between uncertainty and the commodity markets were investigated. Furthermore, the transmission direction of the cross-correlation over different lag periods and asymmetry in this cross-correlation under different trends were identified.

Findings

First, there is significant coherency between uncertainties and CRB mainly in the short and medium terms, with natural disaster and public health uncertainties tending to lead CRB. Second, uncertainty impacts CRB more markedly over shorter lag periods, whereas the impact of CRB on uncertainty gradually increases with longer lag periods. Third, the cross-correlation is asymmetric and multifractal under different trends. Finally, from the perspective of lag periods and trends, the interaction of uncertainty with the Chinese commodity market is significantly different from its interaction with CRB.

Originality/value

First, this study comprehensively constructs a composite uncertainty index based on five types of uncertainty. Second, this study provides a scientific perspective on examining the core and diverse interactions between uncertainty and CRB, as achieved by investigating the interactions of CRB with five categorical and composite uncertainties. Third, this study provides a new research framework to enable multiscale analysis of the complex interaction between uncertainty and the commodity markets.

Citation

Liu, C., Zhang, W., Xie, Q. and Wang, C. (2022), "Multiscale analysis of the complex interaction between uncertainty and the international commodity market", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-02-2022-0284