Modeling and Forecasting Commodity Market Volatility with Long-term Economic and Financial Variables

University of St. Gallen, School of Finance Research Paper No. 2018/24

Journal of Forecasting, 39(2), pp. 126-142, DOI: 10.1002/for.2617

41 Pages Posted: 5 Dec 2018 Last revised: 5 Feb 2020

See all articles by Duc Khuong Nguyen

Duc Khuong Nguyen

IPAG Business School

Thomas Walther

Utrecht University - School of Economics

Date Written: December 3, 2018

Abstract

This paper investigates the time-varying volatility patterns of some major commodities as well as the potential factors that drive their long-term volatility component. For this purpose, we make use of a recently proposed GARCH-MIDAS approach which typically allows us to examine the role of economic and financial variables of different frequencies. Using commodity futures for Crude Oil (WTI and Brent), Gold, Silver and Platinum as well as a commodity index, our results show the necessity of disentangling the short-term and long-term components in modeling and forecasting commodity volatility. They also indicate that the long-term volatility of most commodity futures is significantly driven by the level of the global real economic activity as well as the changes in consumer sentiment, industrial production, and economic policy uncertainty. However, the forecasting results are not alike across commodity futures as no single model fits all commodities.

Keywords: Commodity futures, GARCH, Long-term volatility, Macroeconomic effects, Mixed data sampling

JEL Classification: C58, G17, Q02

Suggested Citation

Nguyen, Duc Khuong and Walther, Thomas, Modeling and Forecasting Commodity Market Volatility with Long-term Economic and Financial Variables (December 3, 2018). University of St. Gallen, School of Finance Research Paper No. 2018/24, Journal of Forecasting, 39(2), pp. 126-142, DOI: 10.1002/for.2617, Available at SSRN: https://ssrn.com/abstract=3294967 or http://dx.doi.org/10.2139/ssrn.3294967

Duc Khuong Nguyen

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

HOME PAGE: http://www.ipag.fr/en/

Thomas Walther (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

HOME PAGE: http://www.thomas-walther.info

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