Do Volatility Determinants Vary across Futures Contracts? Insights from a Smoothed Bayesian Estimator

Abstract:     
We apply a new Bayesian approach to multiple-contract futures data. It allows the volatility of futures prices to depend upon physical inventories and the contract's time to delivery - and it allows those parametric effects to vary over time. We find a time-varying negative relationship between lumber inventories and lumber futures price volatility. The Bayesian approach leads to different conclusions regarding the size of the inventory effect than does the standard method of parametric restrictions across contracts. The inventory effect is smaller for the most recent contracts, possibly due to increasing inventories over time. In contrast, the Bayesian approach does not lead to substantively different conclusions about the time-to-delivery effect than do traditional frequentist methods.

Keywords: Bayesian econometrics, futures markets, lumber, theory of storage, volatility

Accepted Paper Series