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Consumption- and speculation-led change in demand for oil and the response of base metals: A Markov-switching approach

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  • Alam, Md Rafayet
  • Forhad, Md. Abdur Rahman
  • Sah, Nilesh B.

Abstract

We examine how base metal returns respond to various oil shocks applying Markov-switching models. We find that both consumption-led and speculation-led increase in demand for oil increase metal returns while an increase in oil supply decreases metal returns. However, the effects of oil supply shocks and speculation-led oil demand shocks are statistically significant mostly in the high volatility regimes indicating a stronger link between oil and base metals in the volatile markets. Our novel finding of regime-dependent relation between oil and metal markets has important implications for both investors and policy makers.

Suggested Citation

  • Alam, Md Rafayet & Forhad, Md. Abdur Rahman & Sah, Nilesh B., 2022. "Consumption- and speculation-led change in demand for oil and the response of base metals: A Markov-switching approach," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000964
    DOI: 10.1016/j.frl.2022.102783
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    More about this item

    Keywords

    Base metal returns; Oil shocks; Markov-switching;
    All these keywords.

    JEL classification:

    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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