The Economic Importance of Rare Earth Elements Volatility Forecasts

65 Pages Posted: 30 Aug 2016 Last revised: 22 Nov 2017

See all articles by Juliane Proelss

Juliane Proelss

Concordia University, Quebec; Trier University of Applied Sciences

Denis Schweizer

Concordia University

Volker Seiler

Xi'an Jiaotong-Liverpool University; University of Paderborn

Date Written: November 21, 2017

Abstract

We compare the suitability of short-memory (ARMA models), long-memory (ARFIMA models), and a GARCH model to describe the volatility of rare earth elements (REEs). We find strong support for the existence of long-memory effects. A simple long-memory ARFIMA(0,𝑑,0) base model shows generally superior accuracy both in- and out-of-sample, and is robust for various subsamples and estimation windows. Volatility forecasts produced by the base model also convey material forward-looking information for companies in the REE industry. Thus, an active trading strategy based on REE volatility forecasts for these companies significantly outperforms a passive buy-and-hold strategy on both, an absolute and a risk-adjusted return basis.

Keywords: ARFIMA, Fractional Integration, Long Memory, Forecasting, Rare Earth Elements

JEL Classification: C14, C22, Q02, Q31

Suggested Citation

Proelss, Juliane and Schweizer, Denis and Seiler, Volker, The Economic Importance of Rare Earth Elements Volatility Forecasts (November 21, 2017). Available at SSRN: https://ssrn.com/abstract=2831271 or http://dx.doi.org/10.2139/ssrn.2831271

Juliane Proelss

Concordia University, Quebec ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

Trier University of Applied Sciences ( email )

Scheidershof
Trier, 54293
Germany

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

Volker Seiler

Xi'an Jiaotong-Liverpool University ( email )

8 Chongwen Road
Suzhou Industrial Park
Suzhou, Jiangsu 215123
China

University of Paderborn ( email )

Warburger Str. 100
Paderborn, D-33098
Germany

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