Time-Variations in Commodity Price Jumps

32 Pages Posted: 10 Aug 2013 Last revised: 21 Feb 2015

Laszlo Diewald

Technische Universität München (TUM)

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Chardin Wese Simen

University of Reading - ICMA Centre

Date Written: February 20, 2015

Abstract

In this paper, we study jumps in commodity prices. Unlike assumed in existing models of commodity price dynamics, a simple analysis of the data reveals that the probability of tail events is not constant but depends on the time of the year, i.e. exhibits seasonality. We propose a stochastic volatility jump-diffusion model to capture this seasonal variation. Applying the Markov Chain Monte Carlo (MCMC) methodology, we estimate our model using 20 years of futures data from four different commodity markets. We find strong statistical evidence to suggest that our model with seasonal jump intensity outperforms models featuring a constant jump intensity. To demonstrate the practical relevance of our findings, we show that our model typically improves Value-at-Risk (VaR) forecasts.

Keywords: Commodities, Jump frequency, Seasonality, Markov Chain Monte Carlo

JEL Classification: G13, G17

Suggested Citation

Diewald, Laszlo and Prokopczuk, Marcel and Wese Simen, Chardin, Time-Variations in Commodity Price Jumps (February 20, 2015). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2307865 or http://dx.doi.org/10.2139/ssrn.2307865

Laszlo Diewald

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, 80333
Germany

Marcel Prokopczuk (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chardin Wese Simen

University of Reading - ICMA Centre ( email )

Henley Business School
University of Reading
Reading, RG6 6BA
United Kingdom

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