The impact of financial stress shocks on commodity prices

This paper examines the impact of financial distress on commodity returns over the 1990–2023 period. Using Markov switching vector autoregressive models to identify three regimes, we find that an unexpected increase in financial distress is negatively associated with commodity returns. The analysis of impulse response functions suggests that the impact of financial stress shocks on commodity returns is approximately three times greater during the crisis regime, which includes the subprime mortgage crisis and the COVID-19 pandemic, than normal times. Further examination of specific commodities, including foodstuffs, metals, and raw industrials, demonstrates that heightened financial stress also leads to a larger decline in commodity returns in the crisis regime. We also show that the impact is stronger for metals than foodstuffs and raw industrials.