The focal point of this study is the extent of time-varying correlations between commodity prices and macroeconomic uncertainty. In particular, we employ DJ-UBS index and the policy and equity uncertainty indicators of Baker et al. (2013), and construct a measure of their underlying correlation based on the DCC-GARCH model.

Results show that increased volatilities of both policy and equity uncertainties lead to positive returns and increased volatility in commodity markets, while increased volatility in commodity markets increases only the policy uncertainty. Our results also indicate that uncertainty and commodity prices become more correlated since the later part of 2003. The dynamic correlation between policy uncertainty and commodity prices drops rapidly from +0.8 in the mid 2003 to -0.9 before 2008 crisis, and then turns to +0.9 during and after crisis, while the dynamic correlation between equity uncertainty and commodity prices drops from relatively low positive level, and stays at highly negative degree without distinct fluctuations.

On a final note, why correlations between commodity returns and uncertainty behave heterogeneously during extreme economic conditions? Pinpointing the factors that cause the change in the correlation may be an important question that deserves further research.