Macroeconomics, geopolitical risk, and resource commodity price bubbles

Abstract

The pivotal role of resource commodities in economic development has heightened attention to price volatility and the resultant price bubble phenomenon. The Generalized Supremum Augmented Dickey-Fuller (GSADF) method is employed to identify explosive episodes in four resource commodities—crude oil, copper, soybeans, and cotton. Furthermore, a rare-event logit model is used to examine the factors influencing these boom-bust episodes. The empirical results reveal multiple price bubbles across the four resource commodity markets from January 1980 to July 2022. The risk of market bubbles is highest in copper, followed by crude oil, cotton, and soybeans. Results for the driving forces of bubbles show that the exuberance and collapse of bubble behavior can be attributed to microeconomic factors and geopolitics. Specifically, global economic expansion and dollar depreciation significantly increase the likelihood of price bubbles. Geopolitical risk exerts a significant influence on price bubbles, which are more likely to be propagated through specific geopolitical acts (GPA) than through geopolitical threats (GPT). Our findings shed new light on the nature and formation of bubbles in the resource commodity markets, providing valuable guidance for policymakers and investors in making informed decisions regarding price management and investment strategies.