U.S. Monetary Policy and Herding: Evidence from Commodity Markets
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U.S. Monetary Policy and Herding: Evidence from Commodity Markets Nicholas Apergis 1 & Chritina Christou 2 & Tasawar Hayat 3,4 & Tareq Saeed 3
# International Atlantic Economic Society 2020
Abstract This paper investigates the presence of herding behavior across a spectrum of commodities (i.e., agricultural, energy, precious metals, and metals) futures prices obtained from Datastream. For the first time in English-language literature, this study provides an explicit investigation of the role of deviations of U.S. monetary policy decisions from a standard Taylor-type monetary rule, in driving herding behavior with respect to commodity futures prices, spanning the period 1990–2017. The results document that the commodity markets are characterized by herding. Such herding behavior is not only driven by U.S. monetary policy decisions. Such decisions exert asymmetric effects on this behavior. An additional novelty is that the results document that herding is stronger during discretionary monetary policy regimes. Keywords Herd behavior . Commodity futures prices . U.S. monetary policy JEL E44 . G10
Introduction Financial markets often appear to behave frantically, which indicates dramatic changes in investor behavior. The resulting price volatility is inconsistent with rational traders and informationally efficient markets and is attributed to investors’ animal instincts
* Nicholas Apergis [email protected]
1
University of Derby, Derby, UK
2
Open University of Cyprus, Latsia, Cyprus
3
King Abdulaziz University, Jeddah, Saudi Arabia
4
Quaid-I-Azam University, Islamabad, Pakistan
Apergis N. et al.
(Bikhchandani and Sharma 2001). Such a stylized fact is associated with herding behavior in which investors follow the crowd. This herding can occur when agents’ private information is swamped by information derived from observing others and investors act against their private information and follow the crowd (Economou et al. 2011). The literature explores the impact of monetary policy decisions on asset prices, where such decisions provide an informational mechanism that transmits expectations about the future course of interest rates and allowed investors to constantly revise their expectations about the impact of interest rates on asset prices (Bernanke and Kuttner, 2005; Rosa 2013). Although a wide strand of literature examined the impact of commodity prices on macroeconomic variables, (Kilian (2008) offered an excellent survey on evidence regarding the association between commodity prices and macroeconomic variables) less attention was spent on the impact of monetary policy decisions on asset commodity prices. According to theoretical arguments, monetary policy can affect asset pricing through four primary mechanisms/channels: the portfolio balance channel, the signaling or information channel, a confidence channel, and enhancing market liquidity and reducing risk premia. When it comes to commodity pricing, additional channels exist, including through other financial variables, particularly interest rates
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