The Impact of Health Crisis on the Volatility of Commodity Price Return: Does Economic Uncertainty Matter?

Introduction

Covid-19 first appeared in China in late December 2019 in the city of Wuhan and declared a pandemic by the WHO (World Health Organization) on March 12, 2020 following its rapid spread around the world. The economic pause due to the imposition of general containment had an impact on the global economic. The current crisis can be classified as a Black Swan event because it affects all aspects of financial markets. Consequently, some firms have closed their doors, while others have gone completely online. The abrupt economic upheaval brought on by COVID-19 is not only damaging but also has spillover effects as this induced demand and supply shocks in virtually every area of human activity (El-Erian, 2020). In addition, some businesses experienced a reduction in demand, while others had an unanticipated increase in purchase orders. Because of the volatility of the scenario, businesses have encountered unexpected challenges. Consumer behavior, expectations, and experiences have all transformed dramatically. As a result, traditional models may backfire because economic, political, psychological, and socio-cultural factors are all interlinked (Sigala, 2020). Covid-19's consequences could be greater than any previous global crisis in history, with significant repercussions for financial and managerial systems. In fact, this virus served as a stark example of an exogenous shock to the global economy, external to the economic system, which led to a drop in both business production and household consumption. Therefore, thorough research in all fields can be beneficial in understanding current situations and forecasting the future. Numerous literatures that have studied the Covid-19 pandemic have focused on the effects of the virus's uncertainties and government interventions on the macroeconomy in the medium and long run such as Altig et al. (2020), Aksoy et al. (2020), and Kozlowski et al. (2020)

Moreover, this crisis had an impact on commodity markets such asoil, gold, and gas. Due to the travel restrictions set up by governments during the covid-19, which limited the movement of people and products, there was a decrease in demand for energy items like coal and aviation fuel, which in turn caused the price of oil to decline because of the decreased demand (Ozili et al., 2020). Crude oil or so called the “black gold” plays an essential role in many economies. According to Qiang et al. (2019), it is one of the most popular energy sources and one of the most significant commodities in the world economy. Since it is a substantial source of energy, oil is a vital component of production processes in developed nations. Due to its wide utilization in various industries and serves as the foundation for a variety of products such as tires, plastic, medical equipment, clothing just to name a few. Also taking into consideration its price dynamics volatility these recent years, it has become an important subject to governments and companies and has intrigued several researchers. Many authors had analyzed and predicted oil price and its connection with the economic activity.

Another main representative of the commodity market is gold. This precious metal plays a particular role as a valuable asset in time of economic turmoil (Aggarwal et al., 1988). Because of its increasing price during crisis, investors turn to it as a safe haven in their portfolio compared toother assets. Thus, it gained a lot of attention among scholars and economic sectors.

Based on how crude oil and gold markets have developed over years, specifically its prices, we may assume that they have basically sustained similar patterns. For instance, in 2002, because of the US dollar's decline, global inflation, and a few intriguing geopolitical events, both the price of crude oil and gold reached a boom period, began to rise about the same time, and maintained an almost constant upward trend through the first half of 2008.

The principal goal of this study is to investigate further on how crude oil and gold prices fluctuate during the ongoing pandemic Covid-19 taking into consideration economic uncertainty.

The remainder of the paper proceeds as follows Section two provides empirical literature about the impact of health crisis on oil and gold prices. Section three describes the used data and presents the econometric methodology. Empirical results are presented in section four. Finally, the fifth section concludes and give raise some recommendations.