Does the price of strategic commodities respond to U.S. Partisan Conflict?

TL;DR

This paper examines how U.S. partisan conflict influences the returns and volatility of oil and gold, revealing that conflict impacts these markets differently depending on market states and is most influential across the entire volatility distribution.

Contribution

It introduces a parametric Granger causality test in quantiles to analyze the effect of partisan conflict on commodity markets, highlighting state-dependent impacts.

Findings

Partisan conflict affects oil returns mainly in bearish markets.

Partisan conflict influences gold returns primarily in bullish markets.

Partisan conflict index predicts oil and gold volatility across the entire distribution.

Abstract

A noteworthy feature of U.S. politics in recent years is serious partisan conflict, which has led to intensifying polarization and exacerbating high policy uncertainty. The US is a significant player in oil and gold markets. Oil and gold also form the basis of important strategic reserves in the US. We investigate whether U.S. partisan conflict affects the returns and price volatility of oil and gold using a parametric test of Granger causality in quantiles. The empirical results suggest that U.S. partisan conflict has an effect on the returns of oil and gold, and the effects are concentrated at the tail of the conditional distribution of returns. More specifically, the partisan conflict mainly affects oil returns when the crude oil market is in a bearish state (lower quantiles). By contrast, partisan conflict matters for gold returns only when the gold market is in a bullish scenario (higher quantiles). In addition, for the volatility of oil and gold, the predictability of partisan conflict index virtually covers the entire distribution of volatility.