Asymmetric Volatility in Commodity Markets

46 Pages Posted: 24 Jan 2020

See all articles by Yu-Fu Chen

Yu-Fu Chen

University of Dundee - Department of Economic Studies

Xiaoyi Mu

Center for Energy, Petroleum and Mineral Law and Policy, University of Dundee

Date Written: January 23, 2020

Abstract

The paper studies the return-volatility relationship in a range of commodities. We develop a commodity price model and show that the volatility of price changes can be positively or negatively related to demand shocks. An “inverse leverage effect” – the volatility is higher following positive price shocks – is found in more than half of the daily spot prices. The effect is weaker in 3-month futures market and monthly historical volatility measures. Only crude oil exhibits a “leverage effect” – a higher volatility follows a negative shock, and the reason is explored in the context of its special market structure.

Keywords: asymmetric volatility; commodity; inventory effect

JEL Classification: G13, Q02, Q4

Suggested Citation

Chen, Yu-Fu and Mu, Xiaoyi, Asymmetric Volatility in Commodity Markets (January 23, 2020). USAEE Working Paper No. 20-431. Available at SSRN: https://ssrn.com/abstract=3524136 or http://dx.doi.org/10.2139/ssrn.3524136

Yu-Fu Chen

University of Dundee - Department of Economic Studies ( email )

Dundee DD1 4HN, Scotland
United Kingdom
+44 1382 344 383 (Phone)
+44 1382 344 691 (Fax)

Xiaoyi Mu (Contact Author)

Center for Energy, Petroleum and Mineral Law and Policy, University of Dundee ( email )

University of Dundee
Dundee, Scotland DD1 4HN
United Kingdom

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