The Asymmetric Return - Volatility Relationship of Commodity Price Changes

Abstract

There is a well documented asymmetric return - volatility effect of equity returns, that is, negative shocks increase volatility by more than positive shocks. This paper analyzes the return - volatility relationship of commodity price changes and finds an inverted asymmetric effect with a tendency to weaken and converge towards an equity-like effect since the mid 2000s. The change in the asymmetric relationship coincides with the financialization of commodity markets and thus provides an alternative perspective for this phenomenon. We argue that storage and real demand related price movements are increasingly dominated by finance-related price movements where positive commodity price changes provide positive signals for the economy whilst negative price changes provide negative signals and increase volatility.

Keywords: asymmetric volatility, leverage effect, volatility feedback effect, commodities; financialization