Advanced Search
MyIDEAS: Login

Volatility forecasting and risk management for commodity markets in the presence of asymmetry and long memory

Contents:

Author Info

  • Chkili, Walid
  • Hammoudeh, Shawkat
  • Nguyen, Duc Khuong

Abstract

This paper explores the relevance of asymmetry and long memory in modeling and forecasting the conditional volatility and market risk of four widely traded commodities (crude oil, natural gas, gold, and silver). A broad set of the most popular linear and nonlinear GARCH-type models is used to investigate this relevancy. Our in-sample and out-of-sample results show that volatility of commodity returns can be better described by nonlinear volatility models accommodating the long memory and asymmetry features. In particular, the FIAPARCH model is found to be the best suited for estimating the VaR forecasts for both short and long trading positions. This model also gives for all four commodities the lowest number of violations under the Basel II Accord rule, given a risk exposure at the 99% confidence level. Several implications for commodity market risks, policy regulations and hedging strategies can be drawn from the obtained results.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0140988313002363
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 41 (2014)
Issue (Month): C ()
Pages: 1-18

as in new window
Handle: RePEc:eee:eneeco:v:41:y:2014:i:c:p:1-18

Contact details of provider:
Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Commodity markets; GARCH models; Asymmetries; Long memory; Volatility forecasts;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Mohamed El Hedi Arouri & Shawkat Hammoudeh & Amine Lahiani & Duc Khuong Nguyen, 2013. "Long memory and structural breaks in modeling the return and volatility dynamics of precious metals," Working Papers hal-00798033, HAL.
  2. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  3. Shawkat Hammoudeh & Yuan Yuan & Michael McAleer & Mark A. Thompson, 2009. "Precious Metals-Exchange Rate Volatility Transmissions and Hedging Strategies," CIRJE F-Series CIRJE-F-684, CIRJE, Faculty of Economics, University of Tokyo.
  4. Dahl, Christian M. & Iglesias, Emma M., 2009. "Volatility spill-overs in commodity spot prices: New empirical results," Economic Modelling, Elsevier, vol. 26(3), pages 601-607, May.
  5. Elder, John & Serletis, Apostolos, 2008. "Long memory in energy futures prices," Review of Financial Economics, Elsevier, vol. 17(2), pages 146-155.
  6. Aloui, Chaker & Mabrouk, Samir, 2010. "Value-at-risk estimations of energy commodities via long-memory, asymmetry and fat-tailed GARCH models," Energy Policy, Elsevier, vol. 38(5), pages 2326-2339, May.
  7. Kang, Sang Hoon & Cheong, Chongcheul & Yoon, Seong-Min, 2010. "Long memory volatility in Chinese stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(7), pages 1425-1433.
  8. Dirk G. Baur & Thomas K. McDermott, . "Is gold a safe haven? International evidence," The Institute for International Integration Studies Discussion Paper Series iiisdp310, IIIS.
  9. Sadorsky, Perry, 2006. "Modeling and forecasting petroleum futures volatility," Energy Economics, Elsevier, vol. 28(4), pages 467-488, July.
  10. Mabrouk, Samir & Saadi, Samir, 2012. "Parametric Value-at-Risk analysis: Evidence from stock indices," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 305-321.
  11. Agnolucci, Paolo, 2009. "Volatility in crude oil futures: A comparison of the predictive ability of GARCH and implied volatility models," Energy Economics, Elsevier, vol. 31(2), pages 316-321, March.
  12. McMillan, David G. & Ruiz, Isabel, 2009. "Volatility persistence, long memory and time-varying unconditional mean: Evidence from 10 equity indices," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 578-595, May.
  13. Chkili, Walid & Aloui, Chaker & Nguyen, Duc Khuong, 2012. "Asymmetric effects and long memory in dynamic volatility relationships between stock returns and exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 738-757.
  14. Kyongwook Choi & Shawkat Hammoudeh, 2009. "Long Memory in Oil and Refined Products Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 97-116.
  15. Kang, Sang Hoon & Kang, Sang-Mok & Yoon, Seong-Min, 2009. "Forecasting volatility of crude oil markets," Energy Economics, Elsevier, vol. 31(1), pages 119-125, January.
  16. Kang, Sang Hoon & Yoon, Seong-Min, 2013. "Modeling and forecasting the volatility of petroleum futures prices," Energy Economics, Elsevier, vol. 36(C), pages 354-362.
  17. Mohamed El Hedi Arouri & Duc Khuong Nguyen & Amine Lahiani, 2010. "Forecasting the conditional volatility of oil spot and futures prices with structural breaks and long memory models," Working Papers hal-00507831, HAL.
  18. Browne, Frank & Cronin, David, 2006. "Commodity Prices, Money and Inflation," Research Technical Papers 16/RT/06, Central Bank of Ireland.
  19. Regnier, Eva, 2007. "Oil and energy price volatility," Energy Economics, Elsevier, vol. 29(3), pages 405-427, May.
  20. Tang, Ta-Lun & Shieh, Shwu-Jane, 2006. "Long memory in stock index futures markets: A value-at-risk approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 366(C), pages 437-448.
  21. Cheng, Wan-Hsiu & Hung, Jui-Cheng, 2011. "Skewness and leptokurtosis in GARCH-typed VaR estimation of petroleum and metal asset returns," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 160-173, January.
  22. Giot, Pierre & Laurent, Sebastien, 2003. "Market risk in commodity markets: a VaR approach," Energy Economics, Elsevier, vol. 25(5), pages 435-457, September.
  23. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January.
  24. oh, Gabjin & Kim, Seunghwan & Eom, Cheoljun, 2008. "Long-term memory and volatility clustering in high-frequency price changes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(5), pages 1247-1254.
  25. Hammoudeh, Shawkat & Dibooglu, Sel & Aleisa, Eisa, 2004. "Relationships among U.S. oil prices and oil industry equity indices," International Review of Economics & Finance, Elsevier, vol. 13(4), pages 427-453.
  26. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  27. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  28. Fong, Wai Mun & See, Kim Hock, 2002. "A Markov switching model of the conditional volatility of crude oil futures prices," Energy Economics, Elsevier, vol. 24(1), pages 71-95, January.
  29. Annastiina Silvennoinen & Susan Thorp, 2010. "Financialization, Crisis and Commodity Correlation Dynamics," Research Paper Series 267, Quantitative Finance Research Centre, University of Technology, Sydney.
  30. Creti, Anna & Joëts, Marc & Mignon, Valérie, 2013. "On the links between stock and commodity markets' volatility," Energy Economics, Elsevier, vol. 37(C), pages 16-28.
  31. Dietrich Domanski & Alexandra Heath, 2007. "Financial investors and commodity markets," BIS Quarterly Review, Bank for International Settlements, March.
  32. Hung, Jui-Cheng & Lee, Ming-Chih & Liu, Hung-Chun, 2008. "Estimation of value-at-risk for energy commodities via fat-tailed GARCH models," Energy Economics, Elsevier, vol. 30(3), pages 1173-1191, May.
  33. Davidson, James, 2004. "Moment and Memory Properties of Linear Conditional Heteroscedasticity Models, and a New Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 22(1), pages 16-29, January.
  34. Ewing, Bradley T. & Malik, Farooq & Ozfidan, Ozkan, 2002. "Volatility transmission in the oil and natural gas markets," Energy Economics, Elsevier, vol. 24(6), pages 525-538, November.
  35. Hammoudeh, Shawkat & Yuan, Yuan, 2008. "Metal volatility in presence of oil and interest rate shocks," Energy Economics, Elsevier, vol. 30(2), pages 606-620, March.
  36. Wei, Yu & Wang, Yudong & Huang, Dengshi, 2010. "Forecasting crude oil market volatility: Further evidence using GARCH-class models," Energy Economics, Elsevier, vol. 32(6), pages 1477-1484, November.
  37. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
  38. Shawkat Hammoudeh & Farooq Malik & Michael McAleer, 2010. "Risk Management of Precious Metals," Working Papers in Economics 10/37, University of Canterbury, Department of Economics and Finance.
  39. Wang, Yudong & Wu, Chongfeng & Wei, Yu, 2011. "Can GARCH-class models capture long memory in WTI crude oil markets?," Economic Modelling, Elsevier, vol. 28(3), pages 921-927, May.
  40. Conrad, Christian & Karanasos, Menelaos & Zeng, Ning, 2011. "Multivariate fractionally integrated APARCH modeling of stock market volatility: A multi-country study," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 147-159, January.
  41. Y. K. Tse, 1998. "The conditional heteroscedasticity of the yen-dollar exchange rate," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(1), pages 49-55.
  42. Kannan Thuraisamy & Susan S Sharma & Huson A Ahmed, . "The relationship between Asian equity and commodity futures markets," Financial Econometics Series 2012_07, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  43. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
  44. Vivian, Andrew & Wohar, Mark E., 2012. "Commodity volatility breaks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 395-422.
  45. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  46. Cheong, Chin Wen, 2009. "Modeling and forecasting crude oil markets using ARCH-type models," Energy Policy, Elsevier, vol. 37(6), pages 2346-2355, June.
  47. Kasman, Adnan & Kasman, Saadet & Torun, Erdost, 2009. "Dual long memory property in returns and volatility: Evidence from the CEE countries' stock markets," Emerging Markets Review, Elsevier, vol. 10(2), pages 122-139, June.
  48. Alexandra Dwyer & George Gardner & Thomas Williams, 2011. "Global Commodity Markets - Price Volatility and Financialisation," RBA Bulletin, Reserve Bank of Australia, pages 49-58, June.
  49. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2010. "Analyzing and forecasting volatility spillovers, asymmetries and hedging in major oil markets," Energy Economics, Elsevier, vol. 32(6), pages 1445-1455, November.
  50. Mohammadi, Hassan & Su, Lixian, 2010. "International evidence on crude oil price dynamics: Applications of ARIMA-GARCH models," Energy Economics, Elsevier, vol. 32(5), pages 1001-1008, September.
  51. Christian Conrad & Berthold R. Haag, 2006. "Inequality Constraints in the Fractionally Integrated GARCH Model," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(3), pages 413-449.
  52. Cochran, Steven J. & Mansur, Iqbal & Odusami, Babatunde, 2012. "Volatility persistence in metal returns: A FIGARCH approach," Journal of Economics and Business, Elsevier, vol. 64(4), pages 287-305.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Demiralay, Sercan & Ulusoy, Veysel, 2014. "Value-at-risk Predictions of Precious Metals with Long Memory Volatility Models," MPRA Paper 53229, University Library of Munich, Germany.
  2. Ladislav Kristoufek, 2014. "Leverage effect in energy futures," Papers 1403.0064, arXiv.org.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:41:y:2014:i:c:p:1-18. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.