Multi-Frequency Information Flows between Global Commodities and Uncertainties: Evidence from COVID-19 Pandemic

TL;DR: In this article , a mixture of asymmetric and non-linear bi-directional causality between global commodities and uncertainties at different frequencies through the information flow theory is modeled, and the correlation coefficients and variances demonstrate that the high frequency (IMFs 1-4) which measures the short-term dynamics is the dominant frequency, suggesting short-lived market fluctuations relative to real economic growth for institutional investors.

Abstract: Owing to the adverse impact of the COVID-19 pandemic on world economies, it is expected that information flows between commodities and uncertainties have been transformed. Accordingly, the resulting twisted risk among commodities and related uncertainties is presumed to rise during stressed market conditions. Therefore, investors feel pressured to find safe haven investments during the pandemic. For this reason, we model a mixture of asymmetric and non-linear bi-directional causality between global commodities and uncertainties at different frequencies through the information flow theory. Consequently, we utilise the complete ensemble empirical mode decomposition with adaptive noise (CEEMDAN) and the Rényi effective transfer entropy techniques to establish the dynamic flow of information. The intrinsic mode functions (IMFs) from the CEEMDAN are carefully extracted into multi-frequencies through cluster analysis to reconstruct the series into high, medium, and low frequencies in addition to the residue. We utilise daily data from December 31st, 2019, to March 31st, 2021, to provide insights into the COVID-19 pandemic. The correlation coefficients and variances demonstrate that the high frequency (IMFs 1–4) which measures the short-term dynamics is the dominant frequency, suggesting short-lived market fluctuations relative to real economic growth for institutional investors. Moreover, outcomes from the multi-frequency entropy indicate a negative bi-directional causality of information flow between global commodities and uncertainties, especially in the long term. Generally, the findings present pertinent inferences for portfolio diversification, policy decisions, and risk management schemes for global commodities and markets volatilities. We, therefore, advocate that market volatilities act as effective hedges for global commodities, and they clearly act as balancing assets rather than substitutes in the long-term dynamics of the COVID-19 pandemic. Investors who delayed in investing within financial markets of commodities and market volatilities are likely to minimise their portfolio risks.