The Return-Volatility Relation in Commodity Futures Markets

30 Pages Posted: 13 Jun 2015  

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Boda Kang

University of York - Department of Mathematics

Christina Sklibosios Nikitopoulos

University of Technology Sydney - Business School; Financial Research Network (FIRN)

Thuy Duong To

University of New South Wales, Sydney; Financial Research Network (FIRN)

Date Written: June 11, 2015

Abstract

By employing a continuous time stochastic volatility model, the dynamic relation between price returns and volatility changes in the commodity futures markets is analysed. An extensive daily database of gold and crude oil futures and futures options is used to estimate the model that is well suited to assess the return-volatility relation for the entire term structure of futures prices. The empirical results indicate a positive relation in the gold futures market and a negative relation in the crude oil futures market, especially over periods of high volatility principally driven by market-wide shocks. However, the opposite reaction occurs over quiet volatility periods when typically commodity-specific effects dominate. As leverage effect, volatility feedback effect and inventory effect do not adequately explain this reaction especially for the crude oil futures, the convenience yield effect is proposed. Accordingly, commodity futures markets in backwardation entail a positive relation, while futures markets in contango entail a negative relation.

Keywords: Return-volatility relation; Commodity futures returns; Gold futures volatility

JEL Classification: G13, E32, Q40

Suggested Citation

Chiarella, Carl and Kang, Boda and Sklibosios Nikitopoulos, Christina and To, Thuy Duong, The Return-Volatility Relation in Commodity Futures Markets (June 11, 2015). UNSW Business School Research Paper No. 2015 BFIN 05. Available at SSRN: https://ssrn.com/abstract=2617525 or http://dx.doi.org/10.2139/ssrn.2617525

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Boda Kang

University of York - Department of Mathematics ( email )

Heslington
York, YO10 5DD
United Kingdom

HOME PAGE: http://maths.york.ac.uk/www/bk637

Christina Sklibosios Nikitopoulos

University of Technology Sydney - Business School ( email )

15 Broadway, Ultimo
Sydney 2007, New South Wales
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Thuy Duong To (Contact Author)

University of New South Wales, Sydney ( email )

School of Banking and Finance,
University of New South Wales
Sydney, 2052
Australia
61295855865 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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